OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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Increases in Business Investment Rates in OECD Countries in the 1990s

How Much Can be Explained by Fundamentals?

In several OECD countries, investment rates in the business sector grew strongly in the second half of the 1990s. In some cases, the strength of private investment relative to output growth had raised concerns about the risk of capital overhang and the prospect of a prolonged period of slow capital formation in order to bring investment levels back to more sustainable levels. It is possible that the stock market boom has contributed to a rise of investment demand to an excessive level, not only in the United States, but also in the United Kingdom, Canada, Scandinavia and Greece. The purpose of this paper is to assess the contribution of fundamental determinants to the change in investment in the second half of the 1990s, based on the estimation of panel cointegration equations for gross business investment for 18 OECD countries from 1970 to 1999. In addition to the levels of real GDP and a measure of the cost of capital, the set of explanatory variables includes four alternative ...


Keywords: financial development, investment, non-stationary panels
JEL: E22: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Investment; Capital; Intangible Capital; Capacity; C33: Mathematical and Quantitative Methods / Multiple or Simultaneous Equation Models; Multiple Variables / Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models; O16: Economic Development, Innovation, Technological Change, and Growth / Economic Development / Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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