Explaining Trends in UK Business Investment

9 Pages Posted: 26 Apr 2005

See all articles by Hasan Bakhshi

Hasan Bakhshi

Bank of England - Monetary Analysis

Jamie N.R. Thompson

Bank of England

Abstract

The ratio of business investment to GDP at constant prices has been trending upwards over the past two decades, picking up sharply in the second half of the 1990s. This article investigates possible explanations. We argue that the rise largely reflects a sustained fall in the relative price of investment goods, given that there is little discernible trend in the current-price ratio. This is consistent with a significant role for rapid technological progress in the investment goods sector and, given the importance of imported investment goods, for exchange rate developments in explaining trends in UK firms' investment behavior. But other factors, such as falls in the cost of finance and increases in replacement investment, may also have been important. This view is supported by an illustrative model-based analysis.

Suggested Citation

Bakhshi, Hasan and Thompson, Jamie N.R., Explaining Trends in UK Business Investment. Available at SSRN: https://ssrn.com/abstract=708124

Hasan Bakhshi (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
020 7601 5996 (Phone)

Jamie N.R. Thompson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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