Investment, Financial Markets, and Uncertainty

Levy Economics Institute Working Papers No. 743

28 Pages Posted: 25 Dec 2012

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Ana González

Cambridge Econometrics Ltd

Oscar Dejuan

University of Castilla, La Mancha

Date Written: December 20, 2012

Abstract

This paper provides a theoretical explanation of the accumulation process, which accounts for the developments in the financial markets over the recent past. Specifically, our approach is focused on the presence of correlations between physical and financial investment, and how the latter could affect the former. In order to achieve this objective, two assets are considered: equities and bonds. This choice permits us to account for two extreme alternative possibilities: taking risk in the short run with unknown profits, or undertaking a commitment to the long run with known yields. This proposal also accounts for the influence of the cost of external finance and the impact of financial uncertainty, as proxied by the interest rate in the former case and the exchange rate in the latter case; thereby utilizing the Keynesian notion of conventions in the determination of investment. The model thus formulated is subsequently estimated by applying the difference GMM and the system GMM in a panel of 14 OECD countries from 1970 to 2010.

Keywords: Accumulation, Financial Markets, Conventions, Uncertainty, Keynesian Economics

JEL Classification: B22, C23, E22

Suggested Citation

Arestis, Philip and González, Ana and Dejuan, Oscar, Investment, Financial Markets, and Uncertainty (December 20, 2012). Levy Economics Institute Working Papers No. 743. Available at SSRN: https://ssrn.com/abstract=2192140 or http://dx.doi.org/10.2139/ssrn.2192140

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Ana González

Cambridge Econometrics Ltd ( email )

Reuben House
Covent Garden
Cambridge, CB1 2HT
United Kingdom

Oscar Dejuan

University of Castilla, La Mancha ( email )

Plaza Universidad, 1
Facultad Ciencias Económicas y Empresariales
Albacete, 02071
Spain

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