Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper uses a neoclassical investment model extended with installation costs for capital, agency costs for investment financing, and the possibility of the firm being output constrained as a framework for an empirical analysis of investment behaviour in the Swedish manufacturing industry. The theory is implemented within a multivariate error-correction approach on data covering the time period 1951 to 1995, and we gain the following main results: (1) Tobin’s average Q is not the sole determinant of investment, neither in the short nor in the long run, and other variables like real output and capital gearing also affect investment activity; (2) the out-of-sample forecasts of the model track the evolution of actual investment growth quite impressively, especially at short- and medium-term horizons (1-2 years); (3) a relative equity-price variable is shown to constitute a good approximation of average Q, both for empirical modelling in general and forecasting in particular.

Keywords: Forecasting investment; Multivariate error-correction model; Neoclassical investment theory; Tobin's Q

JEL-codes: C32; E22; E27

31 pages, October 1, 1999

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Published as

Bengt Assarsson, Claes Berg and Per Jansson, (2004), 'Investment in Swedish Manufacturing: Analysis and Forecasts', Empirical Economics, vol 29, no 2, pages 261-280

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