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Über dieses Buch

State of the art modeling of investment behavior and analysis of incentive and allocative effects of taxation on investment behavior are reported in these proceedings. Leading researchers from seven OECD countries treat problems ranging from modeling investment behavior and estimating investment equations with various data sets to detailed studies of tax influences on investment behavior. Particular attention is paid to tax reform plans, especially in West Germany and the UK. The role of financial variables and uncertainty is analysed. A major topic in the volume is recent work within Tobin's Q-theoretic framework. Papers report developments and applications of Q-type investment functions, and for the first time estimated Q-theoretic investment equations are presented for West German industries taking into account the complex tax structure.



Introduction: A Summary of the Issues

The level, the composition, the growth and the efficiency of investment is considered to be the main determinant of future economic growth and a key to the revival of output and employment in the OECD countries. Indeed, it has often been stressed that sustained economic recovery depends on renewed growth of fixed investment, and various recent economic analyses have been concerned with the conditions for such a renewal. In view of this importance it is obvious that there is a marked increase in serious economic research about factors affecting investment decisions. Inevitably, approaches to economic analysis and individual points of emphasis have displayed a wide heterogeneity of interest.
Michael Funke

What Does Tobin’s Q add to Modelling of Investment Behaviour?

Although many researchers have drawn attention to the theoretical relevance of Tobin’s Q as a possible financial determinant of investment behaviour, this has had little or no impact on macro-economic modelling and most of the large models still include traditional investment equations. The stock market crisis in October 1987 has clearly illustrated the need for a larger integration of financial and real sides of the macro modelling. This paper seeks to make a modest contribution to this issue by comparing the performance of standard investment equations for five OECD countries with those including a measure of Tobin’s Q.
Pierre Poret, Raymond Torres

Fixed Investment in Japan

This paper studies fixed investment in Japan. The most notable characteristic of the postwar Japanese economy was perhaps its very rapid economic growth, a trait it shared with West Germany. Investment not only determines the rate of capital accumulation, but to the extent that most modern technological innovations are embodied in new capital goods, it also brings technical progress. Through these two channels, it plays a decisive role in determining the rate of economic growth. In the short—run, investment is a very volatile component of aggregate demand, and therefore greatly affects macroeconomic fluctuations. Clearly it is essential for us to understand more profoundly the behavior of investment in order to better grasp the movements of the macroeconomy both in the short—run and the long—run.
H. Yoshikawa

Testing the Sensitivity of Q Investment Equations to Measurement of the Capital Stock

The Q model of investment has recently become a common vehicle for the empirical investigation of the investment decisions of firms. There are two main reasons for its popularity. The model can be derived from an explicit optimisation framework, and it rationalises why expectations play a crucial role. In addition, under conditions of perfect competition and constant returns to scale, unobservable expectations regarding profits and dividends are conveniently summarised by the observable market value of capital (Hayashi (1982)).
Stephen Bond, Michael Devereux

Taxation and Capital Formation in West German Industries: A Q-Theory Approach

The purpose of this paper is to examine empirically the determinants of industry investment in West Germany. The traditional neoclassical theory of investment developed by Jorgenson1 among other economists does not provide a fully satisfactory explanation of the determinants of investment behaviour. The dissatisfaction is not based on the explanatory power of the estimated investment equations, rather the problems arise from the difficulty of interpreting the resulting lag structures. An alternative approach uses the so-called Q-theory of investment which is based on Tobin’s Q-concept and explicitly incorporates the cost of adjustment literature. The question whether this hypothesis is a better approximation to the behaviour of real-world investment has major substantive implications for both macroeconomic and financial economic theory and practice. This paper extends research in the area of the Q-theory of investment. Moreover, our contribution differs in two important respects from earlier studies of the Q-theory of investment in West Germany. First, all existing studies analyse investment behaviour at an aggregate level, i.e. for total industry or total manufacturing. We have also computed investment equations for broad sectors but, in addition, our analysis covers sixteen major industrial sectors out of total manufacturing separately. Secondly, contrary to other existing studies we have used tax-adjusted marginal Q-measures instead of unadjusted average Q-values. The article is organized as follows. The next section describes the investment model. The third and the fourth section review the historical trends in sectoral investment rates and Q-values and present the econometric specification and model. The final section contains a summary of our findings. In appendix I, II, and III abbreviations and computation methods are given.
Michael Funke, Andreas Ryll, Dirk Willenbockel

Economic Policy, Profits, and Investment Behavior in West Germany

In recent years, the conditions for sustained economic growth seem to have improved noticeably in West Germany. Since the recession at the beginning of the eighties, overall profits have recovered dramatically. From 1982 to 1986, income from entrepreneurial activity and property rose by almost 50 p.c. The share of wages in national income dropped by about 5 percentage points. According to standard economic reasoning the redistribution from wages to profits should have ignited a real investment boom leading to faster growth and higher employment. The more so, since there were no bottlenecks forcing economic policy to restrain the upswing. On the contrary, the economy had returned to price level stability and interest rates had fallen to historically low levels. The public sector deficit had been narrowed, and the current account was running a huge surplus, indicating that there was ample room for expansion.
Peter Trapp

Anticipated Tax Changes and Investment in the UK: An Empirical Evaluation of the 1984 Tax Reform

Throughout the postwar period a number of fiscal incentives was introduced to lower the cost of investment and promote capital accumulation in the UK. The most generous incentive was the first year allowance (FYA) which allowed firms to expense all their investment expenditure on plant and up to 75 percent of their expenditure on buildings immediately. In the 1984 Budget, the Chancellor departing from this policy announced the phasing out of the FYA with eventual abolition in 1986. The annual writting down allowance though, was retained.At the same time the corporate tax rate was to be reduced to 35 percent by 1986 in three successive cuts.
Elias Dinenis

Taxation of Capital Income in the Federal Republic of Germany

During the 1970s until the early 1980s in most industrial countries a major objective of tax policy and fiscal policy was to stimulate economic growth by special investment promotion measures. Various instruments were used as investment tax credits, favourable depreciation allowances etc. The combination of high statutory tax rates and favourable depreciation allowances provided a strong impulse to business investment. This philosophy has changed and the main objective of present tax reforms is to reduce statutory tax rates and to broaden the tax base. By that means the tax system is supposed to become fairer, simpler and less vulnerable to ad hoc changes.
W. Leibfritz

Capital Mobility, the Cost of Capital Under Certainty and Effective Tax Rates in Europe

The degree of integration between financial markets has increased substantially in recent years. Casual observation of simple correlations of changes in nominal interest rates, such as those shown in Tables 1 and 2 suggest chat since the mid-1970s co-movements of long-term and to a lesser extent short-term nominal interest rates have tended to increase markedly, particularly during the 1980s and most noticeably amongst countries in the European Monetary System. Moreover, closer study of this question by Obstfeld (1986a, 1986b) have confirmed the basic trends implied by Tables 1 and 2 and cast doubt on an earlier empirical study by Feldstein and Horioka (1980) which suggested indirectly through simple correlations of national savings and investment that capital markets were segmented.1
Julian S. Alworth, Wilhelm Fritz

Government Policies, the Working of Financial Market, Saving and Investment in Japan

It is well-known that the personal saving rate and the investment rate have been quite high in Japan by international standards. Obviously, these high rates have been the main causes for rapid economic growth and strong industrialization after the Second World War. There is already a substantial accumulation of research efforts which seek the general reasons for these high saving rates and investment rates. The current paper investigates in particular the effect of tax policies on the saving rate and the investment rate, and at the same time the interaction between the supply for investment fund (i.e., saving) and the demand for investment fund (i.e., investment) with emphases on the financial sector and on the role of public policies (government policies) in facilitating the smooth interaction between saving and investment. Particular attention is paid to the component of savings and the source of finances for investment.
Toshiaki Tachibanaki

Investment, Finance and Corporate Tax Policy

Throughout the postwar era there has been much concern in the western world about low productivity growth. The potential for embodying technical change and productivity improvememt in capital re-equipment has prompted economists to advocate policies that increase investment flows. These policies were intended to acheive this end via various tax incentives to agents that favourably influence their perceived cost of capital or cash flow position.
G. J. Anderson

The Optimal Reaction of Production and Investment on Uncertainty

In this paper we show under which conditions uncertainty theory provides an unambiguous answer to the question whether firms in an uncertain environment will produce and invest more, the same, less than under certainty. In chapter 2 general models are developed which in principle apply to all decisions under uncertainty, though the decision variable is interpreted here mainly as production (for an overview see Aiginger 1987).
Karl Aiginger


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