Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Mar, 1986, Volume 54, Issue 2

The Present Value of Profits and Cyclical Movements in Investment<249:TPVOPA>2.0.CO;2-1
p. 249-274

Andrew B. Abel, Olivier J. Blanchard

Much of the empirical work on investment is based on the existence of a relation between investment and the expected present value of marginal profits. In this paper we compute such a present value series, under various assumptions about demand and technology, and examine its relation to investment. We find that variations in this present value series are, surprisingly, due more to variations in the cost of capital than to variations in marginal profit. We also find that the present value series, although significantly related to investment, still leaves unexplained a large, serially correlated fraction of the movement in investment.

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