ABSTRACT

Since Keynes’ General Theory (1936), much attention has been given to the determinants of business fixed investment. Economists have recognized that investment is an important factor in determining aggregate economic performance. Investment contributes both to the aggregate level of spending and to the aggregate level of production. Investment not only adds to capital inputs but also brings new technologies to the market. Given the observed volatility of investment and its importance to long-run economic performance, many have argued that governments should pursue policies to stabilize investment and to ensure an adequate level of capital formation. Yet, despite the importance of its role, understanding what drives investment and what causes it to undergo periodic phases of expansion and contraction remains one of the major unanswered problems in present day economics.