The Adaptive Investment Effect: Evidence from Chinese Provinces

A paper of mine, “The Adaptive Investment Effect: Evidence from Chinese Provinces“, co-authored with Dr Kamiar Mohaddes, has recently been published in Economic Letters.

In the paper, we outline that the Adaptive Investment Effect (AIE) is the diversion of investment resources from productive to adaptive capital in response to the effects of climate change. We would expect this diversion to reduce the productivity of investment on economic growth.

For instance, we can imagine that climate change might increase temperatures in some areas. It is well known that higher temperatures reduce labour productivity and so to ameliorate this loss in productivity, firms might invest in air-conditioning units in offices. [...]

Investment Functions

In this article we explain the fundamental factors determining investment decisions of firms, which comprise the investment function. By determining the structure of the investment function we can hypothetically estimate this and thus predict how much a given firm ought to be investing, given economic fundamentals. This is interesting because we could then aggregate such functions – i.e. add up each firm-specific investment equation – to get a measure of what total investment by private firms in the economy ought to be investing. By comparing this amount with actual levels of investment we can derive a measure of the investment gap. [...]

Negative Interest Rate Policy and the Zero Lower Bound

Neoclassical Story of the Monetary Policy Transmission Mechanism

The traditional orthodox story tells us that interest rates affect the economy through a number of channels including (i) the investment channel whereby higher interest rates reduce investment, as it becomes more costly to invest thereby inducing firms to either invest with retained earnings or forego investment because expected profits will be too low at higher interest rates (ii) the consumption channel, which is similar to the investment channel, in that higher interest rates make borrowing more expensive and so higher rates mean consumers cut back on big-ticket items such as houses, cars and white-goods; furthermore higher rates not only make borrowing plans more expensive, but also make actual borrowing more expensive: those with loans already will face higher payments and may thus cut-back elsewhere (iii) the wealth effect stems from the effect of rates on asset prices; higher interest rates mean investors can get higher rates from putting their savings in bank accounts rather than in the stock market (and other financial assets) and so demand for assets falls causing a fall in their price (pushing up the return on that investment) which leads to a negative wealth effect as asset prices fall (iv) finally we consider the export effect, whereby a higher interest rate increases demand for a domestic currency (hot money flows in to take advantage of the higher rate) causing an appreciation which leads to fewer exports and hence lower aggregate demand. [...]

An Introduction to Post-Keynesianism

I recently attended a 3 day Post-Keynesian Study Group (PKSG) workshop at Kingston University, and here is some of what I learnt on the course. I am sure this will spawn many other research interests, leading to future blog articles on some of the theory discussed.

Day 1

The course was to be split up into 3 days, on the first day we would cover Post-Keynesianism, on the second we would continue with PK and financial crises in the morning, followed by Marxist Political Economy in the afternoon and then on the final day we would round off what we had learned, ask any further question and debate the success of student movements in encouraging pluralism. [...]

UK GDP Growth Shrinks in Q4 2012

The UK economy has shrunk by 0.3% in line with many economists’ predictions. The fall is mainly due to a slowdown in North Sea oil extraction, excluding oil and gas extraction the economy shrank 0.1%. This comes after a previous 0.9% growth in GDP during Q3.

Nick Clegg has blamed a lack of capital investment (investment in infrastructure) by the government as an explanation to why GDP is still lacklustre 5 years after the onset of the global financial crisis ( Increased capital spending would result in a rightward (positive) shift of the long run average cost curve. [...]

Network Rail Investment

The article shows plans by Network Rail (the government owned firm which is responsible for maintaining the railway networks in the UK) to invest £37.5 billion in infrastructure over the next 5 years.

The effect of investment is to shift long run average supply curve rightwards. Investment should improve the speed and capacity of the network, this is good for businesses and should be good for the aggregate economy. However the current investment plans are going to mean a rise in train fares (prices are assumed to rise above inflation) which will reduce consumer surplus. This also indicates that price elasticity of demand for rail travel is relatively inelastic (train firms can also use price discrimination based on peak and off-peak travelling times) to allow for a higher price. [...]