Abstract

This paper provides a theoretical explanation of the accumulation process, which accounts for the developments in the financial markets over the recent past. Specifically, our approach is focused on the presence of correlations between physical and financial investment, and how the latter could affect the former. In order to achieve this objective, two assets are considered: equities and bonds. This choice permits us to account for two extreme alternative possibilities: taking risk in the short run with unknown profits, or undertaking a commitment to the long run with known yields. This proposal also accounts for the influence of the cost of external finance and the impact of financial uncertainty, as proxied by the interest rate in the former case and the exchange rate in the latter case; thereby utilizing the Keynesian notion of conventions in the determination of investment. The model thus formulated is subsequently estimated by applying the difference GMM and the system GMM in a panel of 14 OECD countries from 1970 to 2010.

Highlights

  • The development of the financial sector since the financial liberalisation process, which started in the early 1970s, and the great evolution of financial investment during this period, suggests that serious consideration of this complex phenomenon is in order

  • In an attempt to overcome the impossibility of knowing the future, introduces businessmens expectations that relate to several aspects. The latter are: a) aggregate demand, which is the engine of the model; b) capacity utilization, which is the most important indicator of the level of economic activity and provides the opportunity to model expectations about future demand; c) a proxy of financial uncertainty, which accounts for expectations about the exchange rate; and d) the stock market, whose development provides new kinds of business opportunities

  • The purpose of this paper is to analyse the accumulation path in capitalist economies, where financial markets have become one of the fundamental pillars of the system, especially so after the financialisation process, which began in the early 1970s

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Summary

Introduction

The development of the financial sector since the financial liberalisation process, which started in the early 1970s, and the great evolution of financial investment during this period, suggests that serious consideration of this complex phenomenon is in order This should enable one to extend the Keynesian investment function, which does not fully account for the links between financial elements and the real economy. This higher amount of internal funds has not promoted the expected acceleration of the path of capital accumulation.

Investment with labour constraints
The relevance of the real rate of interest and uncertainty to investment
Investment in a financialised economy and expectations
The role of expectations and conventions
Introducing the financial sector
Econometric analysis
Empirical evidence
Method
Findings
Concluding remarks
Full Text
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