The Basic, Volatile, Sluggish and Stabilizing Forces in Aggregate Investment Behavior

Abstract

The paper builds up a macro function of investment to capture various key determinants and explore the intricate determination mechanism of aggregate investment. It explicates the basic trend determinant of investment, locates the cause of investment volatility and identifies the magnifier of volatility, recognizes the sluggish force and its sluggish and metamorphosed effects on investment volatility, discovers the stabilizing forces by analyzing the dual effects between costs of capital and investment, and reconciles economic rationality with the long-established yet puzzling empirical findings that investment is strongly correlated with output while having little correlation with costs of capital. In striking contrast to the conventional literature, this paper uses a macro approach and finds out that the volatility of investment is mainly caused by changes in the change rate of consumption and the famous accelerator is not a volatile but stabilizing force.