Browsing by Subject "E22"

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  • Knight, John; Wang, Wei (2011)
    BOFIT Discussion Papers 15/2011
    Published in The World Economy, Vol. 34, Issue 9, pp. 1476-1506, September 2011
    In recent years China has experienced two forms of extreme macroeconomic imbalance: an expenditure imbalance in the sense of very high investment and very low consumption, giving rise to rapid capital accumulation; and an imbalance between expenditure and pro-duction, producing external imbalance, i.e. a huge surplus on the current account of the balance of payments. Both imbalances imply a low rate of time discount by both govern-ment and society: consumption in the present is forgone in favour of consumption in the future. The paper examines how these imbalances came about, and goes on to consider whether they can be sustained and how they might be redressed. There is no evidence that the rapid capital accumulation has reduced the rate of profit on capital and thus the incen-tive to invest. However, persistent external imbalance poses a threat to investment if it ge-nerates excess liquidity and asset bubbles. The current account surplus rose remarkably in the years 2004-7. This was associated with exogenous increases in competiveness and in saving, both attributable to the economic reform policies. On current policies, the surplus is likely to rise again once the world economy recovers from its recession. This poses three sorts of problems, each of which is examined in turn: difficulties for macroeconomic stabi-lization policies; risk of capital loss on the foreign exchange holdings; and the threat of re-taliation by China's trading partners. A combination of internal and external policies will be required to redress the imbalance. Keywords: China; investment; consumption; current account; exchange rate; external im-balance; macroeconomic imbalance. JEL Classification: E21; E22; E61; F32; F41; F51.
  • Banerjee, Ryan; Hofmann, Boris; Mehrotra, Aaron (2020)
    BOFIT Discussion Papers 6/2020
    Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies.
  • Kauppi, Heikki; Koskela, Erkki; Stenbacka, Rune (2004)
    Suomen Pankin keskustelualoitteita 11/2004
    The study looks at the implications of product market competition and investment for price setting, wage bargaining and thereby for equilibrium unemployment in an economy with product and labour market imperfections.We show that intensified product market competition will reduce equilibrium unemployment, whereas the effect of increased capital intensity is more complex.Higher capital intensity will decrease the equilibrium unemployment when the elasticity of substitution between capital and labour is less than one, while the reverse happens when this elasticity is higher than one, but smaller than the elasticity of substitution between products.Finally, we demonstrate how labour and product market imperfections, characterised by the wage and price setting mark-ups, affect the optimal capital stock.Our findings raise important questions for future empirical research.Key words: equilibrium unemployment, product market imperfections, investment, wage bargaining JEL classification numbers: E22, E24, J51, L11
  • Ledyaeva, Svetlana; Linden, Mikael (2006)
    BOFIT Discussion Papers 17/2006
    Barro and Sala-I-Martin empirical framework of neoclassical Solow-Swan model is specified to determine the FDI impact on per capita growth in 74 Russian regions during period of 1996-2003.The Arellano-Bond GMM-DIFF methodology, developed for dynamic panel data models, is used in estimations.Results imply that in general FDI (or related investment components) do not contribute significantly to economic growth in Russia in the analyzed period. Regional growth in 1996-2003 is explained by the initial level of region's economic development, the 1998 financial crisis, domestic investments, and exports.However some evidence of positive aggregate FDI effects in higher-income regions is relevant.Another interesting result is that natural resource availability seems to be growth-inducing in rich regions, while in poor regions it is not significant.We also found convergence between poor and rich regions in Russia.However FDI seems not to play any significant role in the recent growth convergence process among Russian regions. Key words: Foreign Direct Investment (FDI), Russian regional economy, and economic growth JEL Classification: E22, F21, P27
  • Leino, Topias; Ali-Yrkkö, Jyrki (2014)
    Bank of Finland Research Discussion Papers 12/2014
    We study Foreign Direct Investment (FDI) as a measure of real investment (gross fixed capital formation) in foreign-owned companies. Our data include firm-level information on FDI in-flows and real investment of foreign-owned companies located in Finland. Our results suggest that the recorded annual inflows of FDI do not constitute an accurate measure of annual real investments in foreign-owned companies. Since the beginning of the global recession in 2008, FDI inflows have significantly underestimated real investments in foreign companies in Finland. We seek to explain these findings by describing Finnish FDI target enterprises and subgroups and the nature of their FDI flows from several perspectives. We show how FDI target enterprises use other sources of funding, in addition to FDI, and how a few large transactions, often related to cross-border mergers and acquisitions, can explain a great deal of the recorded annual FDI flows. We also describe how Finland's FDI stock and flow data increasingly consist of funds that merely pass through the FDI enterprises and subgroups, arguably with little or no real economic linkage to the Finnish economy, and we present a method for estimating such pass-through funding. Keywords: Foreign Direct Investment, Gross Fixed Capital Formation, Investment, Measurement, Pass-through Investments JEL classification numbers: F210, F23, E220
  • Verona, Fabio (2013)
    Bank of Finland Research Discussion Papers 18/2013
    Published in Journal of Money, Credit and Banking, Volume 46, Issue 8, December 2014:1627–1656
    Investment in physical capital at the micro level is infrequent and large, or lumpy. The most common explanation for this is that firms face non-convex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the micro level, even in the absence of non-convex adjustment costs. When collecting and processing information is costly, the firm optimally chooses to do it sporadically and to be inactive most of the time. This behavior results in infrequent and possibly large capital adjustments. The model fits plant-level investment rate moments well, and it also matches some higher order moments of aggregate investment rates. Keywords: investment dynamics, information costs, inattentiveness, lumpy investment JEL classification: D21, D83, D92, E22
  • Verona, Fabio (2019)
    Oxford Bulletin of Economics and Statistics 2
    Published in BoF DP 26/2017.
    The investment literature has long acknowledged the time- and frequency-varying dynamics of the relationship between investment, Tobin’s Q and cash flow. In this paper, we use continuous wavelet tools to estimate and assess the relationship between these variables simultaneously at different frequencies and over time. We find that i) Q and cash flow are complementary sources of information for investment, the former being more important for firms’ investment decisions in the medium-to-long run and the latter at business cycles frequencies and ii) investment-Q sensitivity declines over time at all frequencies, while investment-cash flow sensitivity declines at business cycles frequencies but remains largely stable over the medium-to-long run.
  • Verona, Fabio (2013)
    Bank of Finland Research Discussion Papers 16/2013
    In this paper, I introduce lumpy micro-level capital adjustment into a sticky information general equilibrium model. Lumpy adjustment arises because of inattentiveness in capital investment decisions instead of the more common assumption of non-convex adjustment costs. The model features inattentiveness as the only source of stickiness. I find that the model with lumpy investment yields business cycle dynamics which differ substantially from those of an otherwise identical model with frictionless investment and are much more consistent with the empirical evidence. These results therefore strengthen the case in favour of the relevance of microeconomic investment lumpiness for the business cycle. Keywords: sticky information, general equilibrium, lumpy investment, business cycle JEL classification: D83, E10, E22, E32
  • Verona, Fabio (2017)
    Bank of Finland Research Discussion Papers 26/2017
    Pulished in Oxford Bulletin of Economics and Statistics as "Investment, Tobin’s Q, and cash flow across time and frequencies" 2019 ; 82 ; 2 ; 331-346 ;
    The empirical performance of the Q theory of investment can be significantly improved by simultaneously considering the time- and the frequency-varying features of the investment-Q relationship. Using continuous wavelet tools, I assess the investment-Q sensitivity at different frequencies and its evolution over time, as well as the interaction of the financial cycle with the Q theory. The results show that there is a positive, stable medium-to-long-run relationship between investment and Q that begins after a positive, stable long-run relationship between credit and Q materializes. In such case, credit leads and slowly fuels the stock price boom.
  • Ledyaeva, Svetlana (2007)
    BOFIT Discussion Papers 15/2007
    Published in World Economy, Vol. 32, Issue 4, April 2009, pp: 643-666 as "Spatial Econometric Analysis of Foreign Direct Investment Determinants in Russian Regions"
    Using a spatial autoregressive model of cross-sectional and panel data, we study the determinants and dominant strategies of FDI inflows into Russia before and after the 1998 financial crisis. The important determinants of FDI inflows into Russian regions since transition began appear to be market size, the presence of large cities and sea ports, oil and gas availability, and political and legislative risks. Since 1998, it appears the importance of big cities, the Sakhalin region, oil and gas resources and legislation risk has increased, while the importance of political risk and port availability has decreased. Our results also reveal a shift from horizontal FDI strategy to a regional trade-platform FDI strategy. While theory anticipates combined vertical and horizontal motives for regional trade-platform strategies, the lack of evidence of a vertical motive in the Russian case suggests import substitution presently plays a significant role in regional trade-platform FDI. Using a multiple spatial lags approach, we show that neighbouring regions with ports have emerged post-crisis as competitors for FDI and identify agglomeration effects in FDI between adjacent regions with and without ports during the period 1999-2002. Keywords: Foreign Direct Investment, Russian regions, FDI strategy, spatial autoregressive model JEL classification: F21, E22, C21
  • Kilponen, Juha; Verona, Fabio (2016)
    Bank of Finland Research Discussion Papers 32/2016
    We revisit the empirical performance of the Q theory of investment, explicitly taking into account the frequency dependence of investment, Tobin’s Q, and cash flow. The time series are decomposed into orthogonal components of different frequencies using wavelet multiresolution analysis. We find that the Q theory fits the data much better than might be expected (both in-sample and out-of-sample) when the frequency relationship between the variables is taken into account. Merging the wavelet approach and proxies for Q recently suggested in the investment literature also significantly improves the quality of short-term forecasts.
  • Pyyhtiä, Ilmo (2007)
    Bank of Finland Research Discussion Papers 3/2007
    This paper builds on the literature on growth in searching for explanations for the divergent growth performance between the EU countries and the United States.We emphasise the role of R&D investment and perhaps different degrees of elasticity of substitution between capital and labour.We estimate two different production functions, namely Cobb-Douglas and CES specifications, with physical capital, a measure of labour, and residual 'technical trend' as inputs.Our first finding is that in many ICT-producing and using countries such as Denmark, Finland, Ireland, Sweden and the United States technical progress has been accelerating during the past decade.Secondly, this speeding up of technical progress has been associated with R&D investment and perhaps with increasing elasticity of substitution between capital and labour.Hence, our results suggest that there is no growth paradox in Europe: the R&D factor and the elasticity of substitution between capital and labour which have been known to be important factors of economies' growth potential, actually explain a significant part of the divergent growth performance of the European economies as well. Keywords: endogenous growth, panel data estimation, production function, R&D, technical progress, elasticity of substitution JEL classification numbers: E22, E23, O51, O52