Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty

Posted: 22 Sep 2001

See all articles by Alan Carruth

Alan Carruth

University of Kent - Department of Economics

Andrew P. Dickerson

University of Warwick - Institute for Employment Research (IER)

Andrew Henley

Cardiff Business School, Cardiff University; IZA Institute of Labor Economics

Abstract

This paper focuses on the determinants of aggregate investment spending in the UK for the industrial and commercial companies (ICC) sector. It complements recent work by Cuthbertson and Gasparro, who study an augmented Tobin's q model of investment in the manufacturing sector. Important focal points of our analysis are a role for real profits (internal funds), which allow firms to combat liquidity constraints when access to capital markets is not perfect, and the impact of irreversibility and uncertainty in determining aggregate investment spending. Earlier work on manufacturing investment by Bean developed a dynamic error-correction specification based on the flexible accelerator model. Following Cuthbertson and Gasparro we use multivariate cointegration techniques to discover a parsimonious dynamic model, which can explain the investment experience of the ICC sector in the 1980s and early 1990s. Our results show that a model based on investment and output alone does not cointegrate, and a short-run dynamic model of these variables suffers from heteroscedasticity. This may be consistent with the idea that increased (uncontrolled for) uncertainty has led to increased volatility in investment. The possibility that movements in the real price of gold reflect uncertainty in financial and other traded commodity markets is explored. Investigation of this more general model indicates that real profits and the real price of gold can enhance the explanation of investment spending by the ICC sector.

Suggested Citation

Carruth, Alan and Dickerson, Andrew P. and Henley, Andrew, Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty. Available at SSRN: https://ssrn.com/abstract=242844

Alan Carruth (Contact Author)

University of Kent - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom

Andrew P. Dickerson

University of Warwick - Institute for Employment Research (IER) ( email )

Coventry CV4 7AL
United Kingdom

Andrew Henley

Cardiff Business School, Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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