Testing Keynes’ aggregate investment function

Abstract

In Keynes’ model, no variety of private sector spending plays a more critical role than investment. This is so because reaching full employment requires that it be large enough to offset the volume of saving that would be forthcoming at that level of economic activity, which occurs only rarely and by coincidence. Despite its key role, very few Post Keynesians have undertaken empirical studies of Keynes’ approach (as opposed to one based on Keynes). While I suspect that there are a number of reasons for this, perhaps the greatest stumbling block is one related to data: how do we measure not just investors’ expectations, but the difference between what was expected and what actually transpired? I believe I have developed a defensible solution to this problem, one that not only allows for a more direct test of Keynes’ theory but also offers tremendous support for it.