Accelerator Theory Of Investment Pdf
ONE OF THE BEST-ESTABLISHED FACTS in macroeconomics is that businessfixed investment and output move strongly together over the businesscycle. By contrast, investment and the cost of capital are either uncorrelatedor only weakly correlated. These relationships might appear tosuggest that business fixed investment can be best explained by anaccelerator model of investment, whereby investment responds tochanges in the desired capital stock, itself determined by the demand foroutput. The theory behind the accelerator model is akin to the man-onthe-street view that firms have little incentive to invest when currentprospects for selling the output produced by the new capital are relativelypoor.The claim that the correlation of output and investment is due todemand shocks provides a challenge to neoclassical and neo-Keynesiantheories alike. Neoclassical theories of investment view output as theconsequence of firms' choice of capital stock and other factors, not thecause. Put another way, if the neoclassical model is correct, firms shoulduse prices and not quantities as signals in making their investmentdecisions. The observation that investment and output are stronglycorrelated while the cost of capital has little correlation with investmentweighs against the neoclassical model.