Q, Investment, and the Financial Cycle
53 Pages Posted: 6 Sep 2017 Last revised: 3 Dec 2017
Date Written: September 2, 2017
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.
Keywords: Tobin’s Q, investment, financial cycle, time-frequency estimation, continuous wavelets
JEL Classification: C49, E22, G31
Suggested Citation: Suggested Citation