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Australian Business Investment: A New Look at the Neoclassical Approach

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  • ULRICH KOHLI
  • CHRISTOPHER J. RYAN

Abstract

This paper attempts to reconcile neoclassical theory with Australian investment data. We argue that, by focusing almost exclusively on the demand for capital services, neoclassical investment theory neglects two related decisions: the decision to own the existing capital stock, and the decision to produce new capital goods. We propose a simple model of investment behaviour that integrates production decisions with portfolio decisions. Careful consideration is given to the determination of the price of capital, the rental price of capital, and the return on capital. The model is estimated by FIML, and a number of simulation results are reported.

Suggested Citation

  • Ulrich Kohli & Christopher J. Ryan, 1986. "Australian Business Investment: A New Look at the Neoclassical Approach," The Economic Record, The Economic Society of Australia, vol. 62(4), pages 451-467, December.
    • Handle: RePEc:bla:ecorec:v:62:y:1986:i:4:p:451-467
    DOI: 10.1111/j.1475-4932.1986.tb00910.x
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    References listed on IDEAS

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    1. Engle, Robert F & Foley, Duncan K, 1975. "An Asset Price Model of Aggregate Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 625-647, October.
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    3. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    4. repec:bla:econom:v:44:y:1977:i:174:p:163-78 is not listed on IDEAS
    5. Kohli, Ulrich R. & McKibbin, Warwick J., 1982. "Are government deficits the prime cause of inflation?," Journal of Policy Modeling, Elsevier, vol. 4(3), pages 279-309, November.
    6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    7. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    8. Ulrich R. Kohli, 1978. "A Gross National Product Function and the Derived Demand for Imports and Supply of Exports," Canadian Journal of Economics, Canadian Economics Association, vol. 11(2), pages 167-182, May.
    9. repec:bla:ecorec:v:59:y:1983:i:165:p:149-65 is not listed on IDEAS
    10. Turnovsky,Stephen J., 1977. "Macroeconomic Analysis and Stabilization Policy," Cambridge Books, Cambridge University Press, number 9780521291873, September.
    11. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    13. Harold Hotelling, 1932. "Edgeworth's Taxation Paradox and the Nature of Demand and Supply Functions," Journal of Political Economy, University of Chicago Press, vol. 40(5), pages 577-577.
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    Cited by:

    1. WARWICK J. McKIBBIN & ERIC S. SIEGLOFF, 1988. "A Note on Aggregate Investment in Australia," The Economic Record, The Economic Society of Australia, vol. 64(3), pages 209-215, September.

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