The determinants of fixed investment over the business cycle: Some time series evidence

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This paper employs a nine-variable vector autoregressive model to explain fluctuations in nonresidential fixed investment over the postwar business cycle. The results of Granger causality tests and Sims' innovations accounting do not support the Keynesian view that nonresidential fixed investment contains a large autonomous component. We, however, find that nonresidential structure is relatively more exogenous than producers durable equipment, and the latter drives investment in the former. The results further indicate relative prices; interest rates and the accelerator are among the important predictors of both producers durable equipment and nonresidential structure. Changes in the money supply are found to have a significant influence on investment while the effects of fiscal expenditures and government debt are weak.