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Post Keynesian Themes in Investment

Paper Session

Friday, Jan. 6, 2017 1:00 PM – 3:00 PM

Swissotel Chicago, Montreux 3
Hosted By: Union for Radical Political Economics
  • Chair: Daniele Tavani, Colorado State University-Fort Collins

Financialization, Gross Physical Capital Formation, and the Eurozone Crisis

Nina Eichacker
,
Bentley University

Abstract

In this paper we empirically analyze the connection between international lending and borrowing and several measures of financialization in financial and nonfinancial firms on investment in the level of gross physical capital, and the share of GDP represented by gross physical capital investment in OECD countries from the 1980s through the present, to answer the questions of whether unprecedented cross border lending, nonfinancial firms’ holdings of financial assets relative to total assets, or financial firms’ lending as a share of total assets affected domestic investment at the national level. Next, we control for the incidence of financial crisis, particularly the 2008 Global Financial Crisis, as well as the Eurozone Sovereign Debt crisis. Since the onset of financial crisis is correlated with cross-border lending and other financialization variables, this helps answer the question of financial globalization and securitization trends in financial and nonfinancial firms have broadly affected investment in physical capital, with a particular eye to the Eurozone. Finally, we examine firm-level trends in OECD members, to examine the prevalence of financialization in non-financial firms, trends identified by Davis in the United States between the 1970s and 2000s. Doing so provides a more granular portrait of financialization trends and real sector financial fragility in the Eurozone.

Why has the Profit-Investment Link Become Weaker?

OzgUr Orhangazi
,
Kadir Has University
Josh W. Mason
,
City University of New York

Abstract

Historically there has been a high correlation between profits and investment for US nonfinancial corporations. However, starting in the second half of 1980s and especially after 2000, the correlation between profits and investment has become weaker. Moreover, the correlation between debt and investment has also become weaker. This weakening of the profit-investment link is sometimes referred to as the profit-investment puzzle. There are potentially two sets of explanations for the weakening correlation: explanations focusing on nonfinancial channels and explanations focusing on financial channels. The former includes increased industrial concentration, globalization of production and relative productivity/price movements in investment and consumption goods producing sectors. The latter includes the rising shareholder value and increasing financialization of nonfinancial corporations. In this paper, we discuss to what extent these alternative channels help us understand the weakening of the profit-investment link and assess their explanatory power using macro, sectoral and firm-level data.

An Empirical Analysis of Minsky Regimes in the United States Economy

Leila Davis
,
Middlebury College
Joao Paulo Souza
,
Middlebury College
Gonzalo Hernandez
,
Pontifical Xavierian University

Abstract

In this paper we empirically analyze Minskian dynamics in the US economy by applying Minsky’s classifications of financing regimes to a firm-level panel of nonfinancial corporations. We first map Minsky’s definitions of hedge, speculative and Ponzi finance into firm-level data, and describe the incidence and evolution of Minksian regimes across nonfinancial corporations since the early 1970s. Second, we explore the relationship between fluctuations in the aggregate economy and firms’ likelihood of being in a fragile finance regime, and find evidence of small short-run Minsky cycles. To do so, we use linear probability models relating a firm’s probability of being Ponzi to aggregate and sectoral output gaps, and find that these output gaps – which capture variations in macroeconomic conditions exogenous to individual firms – are correlated with an increased probability that a firm is Ponzi. These results are corroborated by quantile regressions based on a continuous financial fragility measure – the interest coverage ratio – that identify differential effects of business cycles on financial fragility at different quantiles of the interest coverage distribution.
Discussant(s)
Esther Jeffers
,
University of Paris 13
Peter Skott
,
University of Massachusetts-Amherst
Steve Fazzari
,
Washington University
Mario Seccareccia
,
University of Ottawa
JEL Classifications
  • B5 - Current Heterodox Approaches
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy