Abstract
In recent decades, investment has been lackluster despite high returns on capital, high valuations measured by Tobin’s Q, and low interest rates. In this paper, we provide an account of weak investment after the Great Recession by explaining why investment has grown decreasingly responsive to interest rates, and by focusing on the role of profits in determining investment. This proposal overcomes some limitations of secular stagnation theories and contributes to accounting for monetary policies’ limited effectiveness in boosting the investment component of aggregate demand. Given stock price distortions, measures of profitability and profits less reliant on stock market valuations should be used to explain investment dynamics in the recent macroeconomic environment.
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