The topic of this post might be “procrastination.” I have written a bit about aggregate consumption in the USA and I keep telling myself to write something similar about investment. I never do. I am using this post as a pre-commitment device (sorry to use the blog for my personal problems).

OK on investment there are two approaches. One is the old Keynesian ad hoc reduced form accidentally theoretical approach of looking for correlations in the data and guessing about causation. This led to the flexible accelerator, which just says that the ratio of investment to GDP is high if GDP growth is high and if (nominal interest rates minus lagged inflation) are low.

Another approach starts with a well defined optimization problem which contains two elements. First investment is desirable because it produces capital which is combined with labor to produce some product which is sold for money. Second there are some adjustment costs which keep the variance of aggregate investment huge as it is and not megagigantic as it would be in the simplest model. This also means that investment depends on the future marginal product of capital as well as the current marginal product of capital.

I think the first approach is vastly superior to the second which has added nothing of value to our understanding. I conclude this based on the following claims (which I promise to document some day — see procrastination)

1) the Flexible accelerator fits data collected decades after it was abandoned by academic macroeconomists sometimes in the late 70s and early 80s.

Here the one issue is that the BEA (the national income and product accountants) has decided that the relative price of investment has decreased markedly since then. This means one has to decide whether to look at real investment divided by real GDP or nominal divided by nominal. The old accelerator fits nominal/nominal fine. To get to (real I)/(real Y)you have to uh multiply real investment by roughly the ratio of the price indices (that is get it back to nominal/nominal). This can be done various ways.