Marginal Efficiency Of Investment Research Articles

Financial Frictions and Shocks in an Estimated Small Open Economy DSGE Model

This paper examines the importance of financial frictions and shocks for macroeconomic fluctuations using an estimated small open economy DSGE model. In doing so, a small open economy DSGE model with unemployment, financial frictions and financial shocks is developed. To quantify effects, the model is estimated using Bayesian methods on Australian and the United States (US) data. The main results are (i) the presence of financial accelerator improves the model fit, and (ii) financial shocks (i.e., credit supply and financial wealth shocks) are important for explaining investment and output fluctuations, (iii) including financial data in the analysis changes the model dynamics and influences the significance of the financial and marginal efficiency of investment (MEI) shocks, and (iv) financial shocks play an important role in generating business cycle fluctuations in both Australia and the US.

Tax Evasion, Investment Shocks, and the Consumption Puzzle: A DSGE Analysis with Financial Frictions

AbstractRecent studies identify Marginal Efficiency of Investment (MEI) shocks as important drivers of the business cycle. However, Dynamic Stochastic General Equilibrium (DSGE) models struggle to explain macroeconomic comovements between consumption and the key real variables after a MEI shock. Moreover, engaging in tax evasion practices is often an answer to financial constraints, which have been recognized as important determinants of cyclical fluctuations as well. We use a medium‐scale New Keynesian DSGE model, that combines tax evasion with financial frictions, to simulate a MEI shock. We show that entrepreneurial tax evasion can solve the comovement problem to a fair extent.

On the welfare and cyclical implications of moderate trend inflation

The welfare and cyclical implications of moderate trend inflation are addressed in an augmented medium-scale DSGE model. Increasing trend inflation from 2 to 4 percent generates a consumption-equivalent welfare loss of about 4 percent. Welfare costs of this magnitude are driven by: staggered wage contracts, trend growth, extended borrowing, a roundabout production structure, and the interaction between trend inflation and shocks to the marginal efficiency of investment (MEI). A sticky-price model abstracting from these features generates much smaller losses. Moderate trend inflation also has important business-cycle implications, interacting much more strongly with MEI shocks than with productivity or monetary shocks.

Spatial variation in the use of reproductive health services over time: a decomposition analysis

BackgroundThe paper argues that several Sub-Saharan African countries have recorded marked improvements in the use of reproductive health services. However, the literature has hardly highlighted such progress and the factors responsible for them. The current study uses Ghana as a case to examine progress in the consumption of reproductive health services over the last two decades and the factors responsible for such progress.MethodsThe study uses two rounds (1998 and 2014) of Demographic and Health Survey data from Ghana. Standard frequencies, a logit model and decomposition of the coefficients of the logit model (i.e. Oaxaca-type decomposition) was employed to examine changes in the use of reproductive health services (4+ antenatal visits and skilled attendance at birth) at national and sub-national levels (i.e the four ecological zones of Ghana) between 1998 and 2014 as well as factors explaining observed spatial changes between the two periods.ResultsDescriptive results suggest that the highest level of improvement occurred in resource-poor zones (i.e. northern belt followed by the southern belt) compared to the middle belt and Greater Accra, where access to resources and infrastructure is relatively better. Results from Oaxaca-type decomposition also suggest that women and partner’s education, household wealth and availability and accessibility to health facilities are the key factors explaining spatial variation in reproductive health service consumption over the two periods. Most importantly, the marginal efficiency of investment in women and partner’s education and access to health services were highest in the two resource poor zones.ConclusionThere is the need to target resource poor settings with existing or new pro-poor reproductive health interventions. Specifically, the northern and southern zones where the key drivers of education and availability of health facilities are the lowest, will be key to further improvements in the consumption of reproductive health services in Ghana.

Term Premium Variability and Monetary Policy

Two traditional explanations for the mean and variability of the term premium are: (i) time-varying risk premia on long bonds, and (ii) segmented markets between long- and short-term bonds. This paper integrates these two approaches into a medium-scale DSGE model. We consider two sources of business cycle variability: shocks to total factor productivity (TFP), and shocks to the marginal efficiency of investment (MEI). The ability of the risk approach to match the first moment of the term premium depends upon the relative importance of these two shocks. If MEI shocks are an important driver of the business cycle, then long bonds are a hedge against the business cycle so that the average term premium is negative. The opposite is the case for the TFP shocks. But for either source of shocks, the risk approach to the term premium predicts a trivial amount of variability in the term premium. In contrast, the segmented markets model can easily match both moments. The market segmentation reflects a real distortion, so that smoothing the term premium is typically welfare-improving. There are two difficulties with such a policy. First, the mean level of the term premium will not properly reflect the segmentation distortion because of the risk adjustment. Second, if the term premium is measured with error, the welfare gain of a term premium peg is naturally reduced. The paper demonstrates that both of these effects are quantitatively modest so that the welfare advantage to a term premium peg survives.

THE EFFECT OF LABOR AND FINANCIAL FRICTIONS ON AGGREGATE FLUCTUATIONS

This paper embeds labor market search frictions into a New Keynesian model with financial frictions. The econometric estimation establishes that labor market frictions substantially improve the empirical fit of the model. The effect of the interaction between labor and financial frictions on aggregate fluctuations depends on the nature of the shock. For monetary policy, technology, and entrepreneurial wealth shocks, labor market frictions amplify the effect of financial frictions, because robust changes in hiring lead to persistent movements in employment and return on capital that reinforce the original effect of financial frictions. For cost-push, labor supply, marginal efficiency of investment, and preference shocks, labor market frictions dampen the effect of financial frictions by reducing the real cost of repaying existing debt, which lowers the external finance premium.

Consumption heterogeneity, employment dynamics and macroeconomic co-movement

Real-business-cycle models rely on total factor productivity (TFP) shocks to explain the observed co-movement among consumption, investment and hours. However an emerging body of evidence identifies “investment shocks” as important drivers of business cycles. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and non-employed can generate co-movement in response non-TFP shocks. Estimation reveals fluctuations in the marginal efficiency of investment that explain the bulk of business-cycle variance in consumption, investment and hours. A corollary of the model׳s empirical success is the labor wedge that is not important at business-cycle frequencies.

Financial Frictions and Sources of Business Cycle

This paper estimates a New Keynesian DSGE model with an explicit financial intermediary sector. Having measures of financial stress, such as the spread between lending and borrowing, enables the model to capture the impact of the financial crisis in a more direct and efficient way. The model fits US post-war macroeconomic data well, and shows that financial shocks play a greater role in explaining the volatility of macroeconomic variables than marginal efficiency of investment (MEI) shocks.

Investment Shocks: A Source of Fluctuations in a Small Open Economy

This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy.

Adverse Selection, Uncertainty Shocks and Business Cycles

This paper develops two dynamic general equilibrium models in which private information about borrowers' riskiness causes adverse selection in credit markets. The models feature a new shock, referred as a lemons shock, which changes the riskiness of return for some but not all borrowers in the mean-preserving spread sense. An increases in relatively risky borrowers or lemons aggravates adverse selection, raises interest rate spreads and shrinks intermediation. Amplified by a counter-cyclical markup in wages and a variable capital utilization rate, a lemons shock drives business cycles. A lemons shock turns out to be equivalent to a financial shock in one model and nearly equivalent to a shock to the marginal efficiency of investment in another model.

Asymmetic Macroeconomic Policies, Weak Rules and Muddy Growth Perspectives (Asymmetrische Makropolitiken, Schwache Regelmechanismen Und Eingetrübte Wachstumsperspektiven) (German)

The macroeconomic policy response to the global financial and economic crisis has brought interest rates (close to) zero and the public debt to record levels despite institutionalized monetary and fiscal polity rules. The paper discusses the long-term implications of asymmetric fiscal and monetary policies which lead into liquidity traps, unsustainable public debt, declining marginal efficiency of investment, and fading growth perspectives. To escape from the liquidity trap a coordinated G3 interest rate increase is recommended.

Labor Supply Heterogeneity and Macroeconomic Comovement

Standard real-business-cycle models must rely on total factor productivity (TFP) shocks to explain the observed co-movement between consumption, investment and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption, can generate co-movement in absence of TFP shocks. Intertemporal substitution of goods and leisure induces co-movement over the business cycle through heterogeneity in consumption behavior of employed and unemployed workers. The result is due to two model features that are introduced to capture important characteristics of US labor market data. First, individual consumption is affected by the number of hours worked with employed consuming more on average than unemployed. Second, changes in the employment rate, a central explanator of total hours variation, then affects aggregate consumption. Demand shocks --- such as shifts in the marginal efficiency of investment, government spending shocks and news shocks --- are shown to generate economic fluctuations consistent with observed business cycles.

Convergence in Transition Countries – Focus on Investment: Central and Eastern Europe, 1970–1996

Our data on investment in Central and Eastern European economies reveal that, though investment rates were typically high in the 1970s, the marginal efficiency of investment was low. Investment shares begun to decline in the 1980s, before the collapse of the communist system, but there was some recovery in most countries after transition. We use the Kalman filter framework to test for convergence in investment rates. We find some evidence of convergence in Central European countries – former Czechoslovakia, Poland and the countries of the former Yugoslavia. For the remainder of the socialist bloc, however, we were unable to isolate convergence in investment shares.

The real exchange rate

This essay concerns the real value of the $U.S. relative to the G-10. (i) What are the dynamics of the fundamental determinants of the real exchange rate and its steady state value? (ii) To what extent are the observed movements in the exchange rate from 1973 to 1988 due to the fundamentals? (iii) How integrated are international capital markets? (iv) How does the real exchange rate respond to (a) changes in the cyclically adjusted government budget deficit, and to (b) changes in the marginal efficiency of investment?

Rate of Return and Optimal Investment in an Imperfect Capital Market

The analysis of a firm's investment decision under certainty involves two basic topics: The determination of the optimal initial total invest ment and the selection of investment projects among alternatives. Following the suggestion first made by Keynes (pp. 135-146), the optimal level of total initial investment is determined by the intersection of marginal efficiency of investment (MEI) and marginal cost of capital (MCC) curves. Hirshleifer promoted an alternative approach. In his 1958 paper, he extended Fisher's idea of the inter temporal allocation of investment funds between two periods. Essential to this approach is the concept of productive and market opportunity curves. If, in addition, the decision unit is assumed to possess a conventional preference function, it can also determine the optimal income and consumption pattern over time. This two-stage procedure of first maximizing invest ment return and then consumption is known as Fisher's Separation Theorem. In order to implement either one of these two approaches, it is necessary to evaluate the rates of return from all feasible investment projects and rank them properly. The current economic literature, however, does not satisfactorily address the question of how to measure investment returns. Two commonly used tech niques are net present value (NPV) and internal rate of return (IRR). The NPV technique, which measures projects by magnitudes instead of rates, disengages itself from the aforesaid investment decision theories. In fact, ranking investment projects by NPVs favors those with large initial outlays. It can lead to erroneous investment decisions if the firm's borrowing capacity is limited at the given cost of capital. On the other hand, the IRR method is beset by its questionable reinvestment assumption and the possibility of multiple rates. Most of these problems were documented, for example, by Brigham (pp. 309-444), McGuigan and Moyer (pp. 494-517), and Solomon, to mention just a few. McGuigan and Moyer (pp. 497) warned that there are some practical difficulties in implementing the Keynesian approach. The basic problem lies in ranking the n-period investment projects and deriving the MEI curve. The same problem would arise with the introduction of Hirshleifer's approach. In such a case, the difficulty would be ranking the projects and deriving the productive opportunity curve. The purpose of this paper is two-fold. The authors propose a generalized rate of return concept designed to evaluate the rates of return from alternative investment projects in an imperfect capital market. Based on these rates of return, the decision maker can rank investment projects properly and perform the analysis of optimal total initial investment along the lines suggested by Keynes or Hirshleifer. In this paper we consider multi-period (N >: 2) investment projects in an imperfect capital market. There are no stringent assumptions imposed on the cash flow pattern of the investment projects, as was the case in the studies by Canton and Lippman, and Dorfman. Our emphasis has been on methods of determin ing the optimal total investment and consump tion in the initial period. As such, it is consistent with the general treatment of the subject in the current literature, but is less ambitious than what was attempted by Hirshleifer (pp. 200-205): Ascertaining optimal investment and consump tion in each and every period. In his analysis, the use of the NPV rule was shown to be not utility-free and a filtering procedure was sug gested to define the opportunity frontier. In section II, the concept of a generalized rate of return is introduced. This rate of return is

A Note on the Marginal Efficiency of Investment and Related Concepts

A simple neo‐classical theory of the demand for capital goods service is presented to clarify the relationship between the marginal productivity of capital and Keynes′s concept of the marginal efficiency of capital. How the latter concept is related to con‐temporary understanding of the marginal efficiency of investment is illustrated, while Keynes′s pessimism regarding stagnant investment is explained within the framework of neo‐classical theory.

On the specification of an investment function

In this paper the process of investment planning is followed step by step. It is assumed that the objective of the planning is to maximize the present value of net receipts. Two alternative assumptions (perfect and imperfect competition), concerning the market where the output is sold, are analyzed. One result is the optimal (desired) quantity of capital on hand plus on order, from which investment demand (i.e. the orders to be placed) is derived. This ‘demand’ is compared with available internal funds, where a positive difference between the two is supposed to be bridged only partially by external financing. The extent to which this occurs depends on the amount to be bridged. Then actual investment demand appears to be a convex linear combination of investment ‘demand’ not restricted by funds available and of internal funds. The weights of the components, however, are not constants. An outline is given of the relation of the above approach to the traditional approach of maximizing profits by equalizing the marginal efficiency of investment and the marginal cost of funds. This is done by considering a two-period model in which costs of funds are explicitly introduced.

On the Marginal Product of Capital and the Marginal Efficiency of Investment

On the Marginal Product of Capital and the Marginal Efficiency of Investment

The Rate of Interest and the Marginal Product of Capital: A Correction

Previous articleNext article No AccessThe Rate of Interest and the Marginal Product of Capital: A CorrectionLloyd A. MetzlerLloyd A. Metzler Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 59, Number 1Feb., 1951 Article DOIhttps://doi.org/10.1086/257029 Views: 3Total views on this site Citations: 4Citations are reported from Crossref Copyright 1951 The University of Chicago PressPDF download Crossref reports the following articles citing this article:Carlo Milana Refuting Samuelson’s capitulation on the re-switching of techniques in the Cambridge capital controversy, The Review of Austrian Economics 46 (Aug 2022).https://doi.org/10.1007/s11138-022-00591-yJianbo Zhao, Guojiang Wei, Kou-Hsiung Chen, Jui-Mei Yien Psychological Capital and University Students’ Entrepreneurial Intention in China: Mediation Effect of Entrepreneurial Capitals, Frontiers in Psychology 10 (Jan 2020).https://doi.org/10.3389/fpsyg.2019.02984Donald J. Harris Profits, Productivity, and Thrift: The Neoclassical Theory of Capital and Distribution Revisited, Journal of Post Keynesian Economics 3, no.33 (Nov 2015): 359–382.https://doi.org/10.1080/01603477.1981.11489229 Abba P. Lerner On the Marginal Product of Capital and the Marginal Efficiency of Investment, Journal of Political Economy 61, no.11 (Oct 2015): 1–14.https://doi.org/10.1086/257335

The Rate of Interest and the Optimum Propensity to Consume

I. BY introducing liquidity preference into the theory of interest Mr. Keynes has provided us with an analytical apparatus of great power to attack problems which hitherto have successfully resisted the intrusion of the economic theorist. In this paper I propose first to elucidate the way in which liquidity preference co-operates with the marginal efficiency of investment and with the propensity to consume in determining the rate of interest and to point out how both the traditional and Mr. Keynes's theory are but special cases of a more general theory. Further I propose to show how the analytical apparatus created by Mr. Keynes can be used to handle the problem which bothered the underconsumption theorists since the time of Malthus and Sismondi. 2. The economic relations by which the rate of interest is determined can be represented by a system of four equations.' The first of these equations is the function relating the amount of money held in cash balances to the rate of interest and to income. This is the liquidity preference function. If M is the amount of money held by the individuals, r their total income and i the rate of interest we have2 M=-L(i, n (I) It is convenient to take M and r as measured in terms of wage-units, or of any other numeraire. Thus r is the real income while M is the real value of the cash balances, both