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Fazzari and Tracy L. Mott Reviewed work(s): Source: Journal of Post Keynesian Economics, Vol. 9, No. 2 (Winter, 1986-1987), pp. 171-187 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/4538001 . Accessed: 11/12/2011 21:30

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and well-behaved neoclassical productionfunctions. SubsequenteconoMeyer and Kuh's TheInvestment The authorsare Assistant Professors of Economics at WashingtonUniversity.in which investmentis modeled as the adjustmentof a capital aggregate to an optimal level. 1970-1982 I. but the first extensive econometricstudyalong these lines was Decision (1957).in Keynes and Kalecki. It differs from the neoclassical theory of optimal capital accumulation. JohnMaynardKeynes and MichalKaleckiindependently presentedtheories of firm behaviorthat emphasizedeffective demand and financial conditions as primarydeterminantsof investment. ArthurDenzau.respectively. Rather. Saint Louis. manufacturingfirm datafrom 1970 to 1982. The historyof estimatingthis kind of investment model began with Kalecki's own work (see Kalecki.STEVEN M.S. Josef Steindl (1976). MOTT The investmenttheories of Kalecki and Keynes: an empirical study of firm data. Journal of Post Keynesian Economics//Winter 1986-87. This theory has been extendedby James Duesenberry(1958). perfect competition. Boulder. and the University of Colorado. assuming profit-maximization. 1969). EdwardGreenberg. No. FAZZARI and TRACY L. This paper analyzes the determinantsof investmentfrom the perspective of Keynes and Kaleckiusing a large sampleof U. and others.Donald Harris. investmentin fixed capital primarilydependson a firm's demandexpectationsrelativeto its existing capacityand its abilityto generateinvestmentfundingthroughinternal cash flow and external debt financing. Introduction In the 1930s. Vol.They would like to thank Paul Davidson. IX. John Meyer and Edwin Kuh (1957). 2 171 . and Hyman Minsky for helpful comments and suggestions. Hyman Minsky (1975).

we obtainedresultsthatclearlyindicatea strongindependent influence for internal liquidity on investment. Using a large pooled time series cross-section sample.2 Anotherdifficulty with the earlier empirical analyses of Kaleckian and post-Keynesianinvestment models and the comparative studies cited above is that they used datageneratedprimarilyin the 1950s and 1960s. Coen (1971) analyzedthe effect of cash flow on the adjustment speed of actual to desired capital.becausecollinearity and small sample sizes made it difficult to distinguishclearly between the independenteffects of liquidity and acceleratorvariables in time series regressions. 1133).172 ECONOMICS JOURNALOF POST KEYNESIAN metricworkusing whatMeyer andKuhcalled the "accelerator-residual funds hypothesis" was undertakenby Meyer and Glauber(1964). 1979). 1971. Kuh(1963). but it has been overshadowedin recentyears by neoclassical models or models based on James Tobin's "q" theory of investment. The theory was among the alternatives tested in several comparative studies of empirical investment functions (see Jorgenson. 1971.This supportsan importantpart of the Kaleckianand post-Keynesiantheory that has not fared well in some other studies. p.S. 129). however. 1971. Elliott. The empirical results obtained with the accelerator-residual funds model have been criticized on the groundsthat the flow variablesused to representliquidity. and Clark. In the 1970s. 129-130) specifically recognizes this point. even when sales variablesare includedin the equation. Anderson(1964). among others. . The 1'"Ouroverall conclusion is that where internalfinancevariablesappearas sigificant determinantsof desired capital. succeedonly because they are highly correlatedwith the outputor sales variablesthat appear in neoclassical investmentmodels. they representthe level of output" (Jorgenson. He proposes a cross-sectional study of investmentsimilar to what we present in this paper.. . andEvans(1967). since utilization in practice is very closely correlatedwith profits" (p. The generally tranquilexpansion that characterizedthe U. the environmentchanged. Resek (1966). economy from the KoreanWar to the late 1960s resulted in data that investshowed little of the volatilitywhich is centralto post-Keynesian ment theory. 2Steindl(1976. This approachmay not have been satisfactoryfor earlierstudiesthatused aggregatetime series data. however. This studyaddressesthis criticism directly by including both sales and flow liquidity variables in the estimatedequations. pp. Bischoff.such as profitsor cash flow. He writes that time series studies of investmentuse "a particularlyhazardousprocedure . 1973.

we see that the determinantsof the demandfor replacement investment are essentially similar to the determinantsof net investment demand. causingsignificant we overtheprevious decades. pp. the mostcommonly literature. wherethedemand the pricethefirmmustpayfora priceequals supply of of investment Onedeterminant PDis somemeasure (Ps). 4Using this framework. The investmentmodel for to Keynes(1936. in II. variable output for The usedis capacity utilization. (2) variablesmeasuring internallygeneratedfinancefor firms have a on influence firminvestment strong positiveandindependent expendiof and (3) the largerthe interestcommitments firms. pp. demand pricefor valueof profit as price(PD)is defined thepresent capital.or. marginal In the relevant demand. capacity meetforthcoming capaccosts. utilization. of The remainder this paperis organizedas follows.prices.therefore. plans and linkedwithprojected demand relativeto current closely capacity.the lowertheirinvestment. 107-113.4 thisprojection bebasedonobserved will levelsof capacity 3Steindl(1976. The regression resultsappear section4.Thedemand flows a firmexpectsto earnfroma marginal investment expenditure afterdeducting The level of investment will settle financingcosts. pp. ceteris ture. Excesscapacity relativeto demand raises ity involvescarrying be thesecosts andreducesprofits. sampleand in varioussubsamples. equivalently. 1-14). Theseresultsholdup in the full paribus.AND KEYNES INVESTMENT THEORIES KALECKI OF 173 in of conditions amplitude fluctuation sales. expectthe two tivelysmooth of features thepost-Keynesian to emerge more distinguishing approach clearlyin the analysisof the recentdatathanin earlierstudies. chapter11) linkedthe demand investment the the marginal efficiencyof capital. 82-88) and Kalecki (1971. Section 2 summarizes theoretical the framework. However.3 reason thisis straightforward. tainsufficient to demand. with Theresultspresented areconsistent threemajor here empirical withthepost-Keynesian utiliidentified view: (1) capacity hypotheses zation or sales variableshave a positive effect on investment.Therefore. Section3 presents specifithe cationof themodelwe estimate discusses empirical and the techniques we use.andfinancial greatin datathathadbeenrelavariability ly increased. Similar argumentscan be found in Baranand Sweezy (1966. .Investment must. 127-130) argues that utilization is the prime determinant of expected profitabilityand thus an essential determinantof investment. The is Firmswantto maindirecteffectof investment on output capacity.

" These ideas have been extendedby Minsky(1975). Keynes (1936. p. Kalecki (1971. and Steindl (1976. 105-123). voluntary default or other meansof escape. pp. involuntarydefault due to the disappointmentof expectations. 1986). 49-85). Kalecki(1937. Keynes (1936. This implies that dPs/dl is approximatelyzero. 5See Duesenberry(1958.7 There are several reasons why the cost of financing investment externallywill rise as the level of investmentincreases. from the fulfillment of obligation. pp. pp.e. pp. 1971. It can invest up to I = F1/Ps without additional borrowing. which show that replacementand modernizationinvestmentare positively correlated with investmentfor expansion.so thatmarginalexpendituresbeyondI createnew interestobligationsfor the firm. 105-109) and Wood (1975). or to the possible insufficiencyof the marginof security. 1972." that "may be due to moral hazard. . because the decline in the scarcityof capitalreducesthe quasi-rent earnedby capital (see also Davisdon. possibly lawful. 6See Kalecki (1937. Let F. 105-109) arguedfor a "principleof increasingrisk. who emphasizesthe This is consistent with the results of Feldstein and Foot (1971) and Eisner (1978). denote the amount of internal cash flow the firm can use to finance investment. See Goldsmith(1965). althoughthey are less variable. which he called "lender's risk. the costs of producinginvestment goods will not be significantlyaffected by changing investment levels. pp. pp. Othershave linkedthe fall in PD as investmentincreasesdirectlyto firms' perceptionsof limited output markets. See Kalecki (1937. 1971. 72-73). 1971. especially chapters 11 and 12). p. 46-49). pp. The demandprice for investmentalso depends on financial conditions. 144) analyzed a similar phenomenon. This implies that lenders will demand higher interest rates as the level of a firm's investmentrises (see Mott. 7Wedo not consider the possibility of investmentfinance throughnew equity here since this has been shown to be insignificant. it is assumedthatexcess capacity exists in capitalgoods industries.Any investmentexceeding Imust be financedexternally. and Minsky (1975. pp. chapter5).hence.174 JOURNALOF POST KEYNESIAN ECONOMICS Keynes (1936. Mott (1982.5Following Steindl (1976). chapter4). Davidson (1972. 122-124)." claiming thatthe marginalrisk of fixed capitalinvestmentrises with the level of investment. 110-123).6 A firm's investmentprogramcan be financedwith fundsgenerated by its own cash flow. 136 andchapter16) also positeda fall in the return on investment(and thus a fall in PD) as investmentrises. i. or the firm can finance its expenditures externallyby takingon debt andsetting up cash paymentcommitments. Though new equity reduces the risk of illiquidity. it is more costly to the existing shareholders than borrowing.e. i.

and the greaterthe riskpremiumthe lenderwill require. lenderswill requirea higherinterestrateto compensate for the increasingrisk of default.The resultis similarto Kalecki's. CC) Increases in investment(I) or cash commitments(CC) reduce the demandprice. Rising capacityutilization (u) or an increasein the investment goods that can be purchasedwith internalcash flow (FI/Ps) will increase the demand price. Fi. Thus. (3) 1* = I(u. otherthingsequal. U. (1) PD = PD(I. that is the basis of the empirical analysis that follows. CC) = Ps."which is linkedto the level of a firm's interestobligationsor cash commitments(CC). The extentto which financingcosts rise with investmentwill depend on the bankers'appraisalof a firm's abilityto carrymarginalincreases in debt. Solving for I* gives a reduced form for investment. CC). This lowers the firm's demandprice of investmentas the level of investmentincreasesbeyond what can be financed internally. Equating Ps and PD gives a structural relation that determines a representativefirm's investment: (2) PD(I*. The higher CC.the more heavily leveragedthe firm is. Equation (1) gives our specification of the effective demandprice for investment faced by an individual firm. PD will fall fasterwith increasinginvestment. holding the firm's financial resources fixed.OF INVESTMENT THEORIES KALECKI AND KEYNES 175 relationshipbetween internalcash flow and contractual paymentcommitments as a key determinantof the financing terms a firm can arbusiness loan is based on range. The key measureof the firm's ability to carrymoredebt is the "marginof security. FI/Ps. FI/Ps./Ps.the lower the level of internal finance.The "marginof security" for the loan is the amountby which the firm's expectedincome exceeds its total contractual paymentcommitments. the lower the marginof securityandthe greater the increasing risk problems. Minsky argues that a well-structured the lender's expectationthat the debt can be serviced from the future income generatedby a firm's operations. As investment increases. .Clearly. whereI* representsthe investmentlevel the firm chooses. the lower the margin of security for loans.

Then.176 JOURNALOF POST KEYNESIAN ECONOMICS PoDPS PS I lI I I I= F/P/ I "Dl P (I. Both approachesresult in the same empirical investmentequation. Therefore. For investmentfinanced internally CC makes little difference. 73-105). chapter4) by integratingfinancial conditions into the demandprice for investmentgoods. however. pp. FI/P. so the PD curve will not fall significantlyuntil after 7 is reached. the supply price includes the capitalizedvalue of financing costs as well as the purchaseprice of investment goods. and Mott (1982. pp. althoughthe analysis is presentedas if the firm exhausts its entire flow of internalfinance before it borrows. higher CC makes the PD curve fall faster beyond 7. Thus. the distinction is not crucial for the purposes of this paper. the PD curve also shifts out horizontally because a greater internal cash flow means that more investment can be financed without resorting to external funding. See Duesenberry(1958. pp. pp. Other authorshave modeled financial constraintsthroughthe supply of funds firms face. Evans (1969. 37-59). Minsky (1975. and I* is reduced. such a strong assumptionis not necessary. CC) I i* Figure 1 The model is presented graphically in Figure 1. we see that variationsin CC affect the demandprice of investment somewhat differently. An increase in capacity utilization shifts the PD curve outward and increases 1*. 49-112). This analysis follows Davidson (1972.8 8Note that. If a firm takes on debt to finance a project that it could have financed out of internal funds. As FI rises. . But higher cash commitmentsresulting from the financing of past projects increase the risk of new investment beyond the level that can be internally financed. we would not expect it to face serious increasingrisk problems. u. 93-116). Holding FI constant.The main point is that the cost of finance faced by a firm will rise as debt paymentcommitmentsincrease relative to internalcash flow availableto service the debt.

The best way of incorporating into an empirical investmentequationwould be to include a capacity utilizationvariable. The L functions on SALES. IFIN. The remainderof this section discusses the connectionbetweenthe empiricalvariablesandthe theoretical model.OF AND KEYNES INVESTMENT THEORIES KALECKI 177 III. INTEXP: net annual interest expense. (2) the positive relation between internal finance (F1) and investment. the form of which is discussed later. (3) the negative relationbetween cash paymentcommitments(CC) and investment. IFIN: internal finance. GPLANT: book value of gross plant. Capacityutilizationis proxiedby sales datain the empiricalspecification. However.no acceptablemeasureof capacityutilization is availablefor the individualfirm datawe use. The model presentedin the last section linkedthe demandfor investthis effect ment to capacityutilization. Eachof these propositionsfollows directlyfromthe model in section 2. The variable definitions are: INVST: annualcapital expenditures. Variationsin sales . defined as after-taxprofits plus depreciationallowances minus common and preferreddividends. It is not possible to determineoutputcapacityfrom financialdata. The basic investmentequationestimatedin the paperis a linearized version of equation (3): (4) INVST = ao + a1 L(SALES) + a2 L(IFIN) + a3 L(INTEXP) + a4 (GPLANT). SALES: net annual sales. the econometricestimationtechniques.andthe datasample used. and INTEXP representlags. Empiricalspecification Three empiricalimplicationsof the model presentedin the last section are tested here: (1) the positive relationbetweeninvestmentandcapacityutilization (u).

for example). However. The GPLANT variableis included in equation(6) for econometric reasons. In our regressions. With the data set used here. Since GPLANT only proxies the size of the firm. Lagged interestexpense (INTEXP) is used to estimate the effect of contractualcash paymentcommitments(CC). Because individual firm data are used.IFIN is lagged to accountfor the time betweeninvestment decisions and actual expenditure. chapter5) our model emphasizes the importanceof the flow of committed cash flows as the relevant constrainton investmentfinance. it was not lagged in the estimation equations. holding the size of the firm constant. investment will be variablessimplybecause positively correlatedwith all the independent all the financialdatawill tend to be largerfor largerfirms. By includside of equation(4) ing the book value of gross planton the right-hand as a measure of the overall size of the firm. some kind of lag distributionis often imposed to reduce the multi-collinearitycaused by including highly correlatedlags in a regression.unconstrained any by distributedlag assumptions.this effect was usually modeled by variables thatrepresented stock of liquid assets or the stock of debt (see the Meyer and Kuh.178 JOURNALOF POST KEYNESIAN ECONOMICS are highly correlatedwith variations in utilization. The analysisin section 2 also identifies an independent effect of the level of internalfinance(F1)on investment. we can interpret the estimated coefficients of the other independentvariablesas the effect on investment. For these reasonscontemporaneous lagged valuesof the variablesare entered and as separateregressorsin our estimatedequations. and Meyer and Glauber. following Minsky (1975. this kind of multi-collinearity will be less seriousbecausethe pooled time series cross-sectionsample of over 9. In past studies of postKeynesianinvestmenttheory. The contemporaneousvariables for IFIN and INTEXP have been omitted to avoid a possible simultaneitybias.The measureused for IFIN is the flow of funds availableto firms to finance capital expenditure: after-taxprofits plus depreciationallowances minus dividends. current . 1957. either internally or externally.000 observations improves the ability of a regression to distinguish the effects of correlatedexplanatoryvariables. Because all investment must be financed somehow. In time series studies that use small samples of quarterlyobservations. The results in the next section show thatthis approachresults in a more successful empiricalspecification. so this approach should yield acceptableresults.1964.

but quite small. The estimatedcoefficient on the thirdlag of SALESwas positive.First we used the residuals(eit) from an OLS regression to estimate Qi as a iite Qi= t=2 eit-hi/ sEi t=2 t-i 9We are indebted to Joel Prakken for making this observation. while the cross-sectionvariationamong differentfirms is The residualsfrom an ordinaryleast likely to cause heteroscedasticity. squares(OLS) regressionusing the specificationof equation(4) show both of these characteristics. IFIN and INTEXP.Thereforewe used an estimatedgeneralized least squares techniqueto obtain more efficient estimates. Omitting the contemporaneous finance variablesfrom the regression and using values alleviates this problem.was not significantlyaffectedby includingmore independent These resultsindicatemulti-collinearityamongthe longer lags of lags. For these reasons. equationswere estimated The using a three-stageprocedure. the results reportedin the next section includetwo lags for each variable.The conclusionsdrawnare not affected by including longer lags. The time series variationfor individualfirms often generates serial correlationin the errorterms.9 only lagged Lags up to five years' lag were considered for each variable. Several econometric problems arise when using pooled cross-section time series data to obtain regression estimates. The most interestingcomparisonis obtainedbetween the results with two andthreelags. an estimate of the response of investment to a permanentchange in the variables. The magnitudeof the coefficients for the first two lags also increased. the estimatedregressionwith two lags had a lower root mean squarederror than the equationwith three lags. . When a third lag was added for IFIN and INTEXP.INVESTMENT THEORIES OF KALECKI AND KEYNES 179 investmentis closely linked to currentfinance by definition. This error term allows for both serial correlationandheteroscedasticity. so the sum of the coefficients. The techniqueis based on the assumptionthat the error terms for each firm follow a first-orderautoregressiveprocess of the form: (it = QiEit-1 + Vit where it is the error for firm i at time t and vit has a zero mean and a variance a that depends on the firm.Also. their estimated coefficients had the opposite sign from the coefficients on the first two lags.

Empiricalresults in Theexplanatory powerof theinvestment theory presented section2 anddatasample. moredetailed A of and analysis this approach further references theeconometric to literature be foundin Judge may et al.S.S.The representing '°Standard and Poor's COMPUSTAT service maintains extensive financial data for individual U. (1985.All data were for for adjusted inflation dividing theimplicit by by pricedeflator U.180 JOURNAL OF POST KEYNESIAN ECONOMICS in of whereTis thenumber observations thetimeseriesforeachfirm.S. theregressions investment from 1970-1982. a or thedatareflected major for (2) merger acquisition theyear. is generally specification quitegoodforourempirical All threepropositions out at the beginning section3 are well of set in regressionsrun over the whole sample and various supported investThe between showa positiverelation subsamples. IV. manufacturing (2-digitSIC-Standard dustrial Classification-codes between20 and 39) were used for the years 1967-1982.391 observations. national Thetotalsample contained 9.iXit-l. as data for (3) The autocorrelation correction that the data for procedure requires eachfirmconstitute continuous a seriesin time. regressions mentand the variables sales and internalfinance. Thenwe obtained residuals the OLS (vit) froma transformed regression in whichall variables werereplaced Xit .andonlyfirmsthathad at least six time series observations were included. 0 Datafor U. 485-490). The data were drawnfrom the COMPUSTAT annualindustrial firms Intape. and Canadian firms. we estimate u2 by S2 = 1 T1 T iS t=2 2t' Thetransformed weredividedby Si to correct data heteroscedasticity in the finalregression. pp.The datafrom 1967-1969wereusedonly for conso use data structing laggedvariables. .or a necessary itemwasreported notavailable theyear.A firm'sobservation an individual was excluded for year fromthe sampleif one of the followingthreeconditions arose: for (1) firmdatawerenot updated the year. gross product. Using Xit by the vit residuals.

364 (INTEXP_2) + . and -.4) (2.144 (GPLANT) (9.6) (2.2) (0. however. These coefficients are relative to a zero value for 1970. ..Withthis specification.3) (1.023 (D76) .8) .1) .0033 (SALES_2) (16. The elasticities of investmentwith respect to a 1 percent variables.059 (D71) .091 (D81) .004 (D82) (t statistics in parentheses) This equation includes "fixed effects" that allow separateintercepts for each firm and each year.4) (012.055 (D80) + .423 (INTEXP_1) (16...033 (D72) + .2) (0.7) (1.0185 (SALES) + .037 (D75) (4. The estimated equation for the full sample is: (5) INVST = . The intercepts for each of the 835 firms in sample are not reported in equation(5). since the estimatedequationshows a strong and independenteffect for internal financeeven thoughit is includedwith sales in the regression. it is unlikelythatIFIN acts only as a proxy for outputor a sales accelerator.025 (D78) + . 16 for INTEXP.7) (1.3) + .9) (0. are .32 for SALES.6) (5. The negative coefficients on the lags of INTEXP are also consistent .7) (3..evaluatedat the sampermanentincreasein the independent means.171 (IFIN_1) + . ple The positive and significantcoefficient on SALES is not surprising since outputor acceleratorvariableshave been foundto have explanatory powerin investmentequationsbased on a wide varietyof theoretical foundations.058 (IFIN-2) ..1) (4. The annual interceptsare reported for 1971 through 1982 as the coefficients on the variables D71 through D82.INVESTMENT THEORIES KALECKI OF AND KEYNES 181 interestexpense variableshave the expected negative sign in our estimated equations.003 (D74) .9) (7.The results for IFIN are striking.025 (D79) + .5) .0025 (SALES-1) + .51) (2.4) (48.011 (D77) .21 for IFIN.

To confirm the results from the pooled time series cross-section regressions. other studies often focusedon stock measuresof debtburden(suchas the stock of long-term debt. Industrieswere divided by two-digit SIC codes. pp. therefore. high interestexpenses. '2As in other studies. with other things held constant. Meyer and Kuh (1957. for example). 117-121) and Meyer and Glauber (1964. 88-94).1 Therearetwo explanationsfor the relative strengthof our interestexpensevariable." or it could be the result of other cyclical influences on investmentnot accountedfor by our model.Holding the other variablesconstant. These results implythatthereis greatercyclical variationin investment than can be accounted for by changes in the independentvariables alone. Because "See. the equationwas estimatedseparatelyfor each industryin the sample. It is also interestingto examinethe patternof the annualintercepts. it is more risky to finance the firm's investment expenditures. the key to "validating" the liabilities a firm incurs is for the firm to generate sufficient cash flow to meet its ongoing commitments. we find higher lagged interestexpenses indicatethat a greaterproportion of the firm's cash flow is committedto debt service and. .as the results indicate.First. The strengthof the effect is particularly interestingsince otherstudieshave had little success in obtainingstatistically significantresults for variables used to representsimilareffects. pp. For example. particularly with data that could be used to analyzethis effect over short periods. this issue deserves furtherinvestigation. More attentionwill be paid to the adequacyof internalcash flow to meet paymentcommitmentsin an environmentwhere the risk of default is higherand the terms available for investmentfinancing are less stable. for example. chapter 5) has pointed out. althoughthey generally lag somewhatbehindchanges in GNP. Thus. But as Minsky (1975. This may be explainedby "animal spirits.12The second explanationfor the significance of the INTEXP variable is that the sample used here is drawn from a period (1970-1982) with much greater financial turbulencethan the sample periods used in earlier studies. thatis. we found little significance for stock measuresof debt in our investmentequation. will constraininvestment. The variationexplainedby these shifting interceptsis not trivial.high levels of committed cashflows. In any case.evaluated the samplemeans.182 ECONOMICS JOURNALOF POST KEYNESIAN with the theorypresentedearlier. such as calendarquarters. They tend to move pro-cyclically. the change from 1974 to 1975 at explainsa 4 percentdropin investment.

we estimatedseparate equationsfor each industry. multi-collinearityposed more of a problem. These refrom the results gressions requirea somewhatdifferent interpretation presentedso far. Therefore. the sample size for each of the 20 industriesis much smaller than the aggregatepooled sample. The pure cross-sectionresults. INTEXP = net annual interestexpense. For the final empiricaltest.The pooled cross-sectiontime series with firm-specific intercepts uses data corrected for differences in the mean values between firms. so the estimates are based on variationsbetweenfirms. The sales coefficients are small and have unpredictable signs in the pure cross-section regressions. the samplewas divided into 13 separate cross sections for the years 1970 through 1982. SALES = net annualsales. Therefore. *A 5 percent significance level was used for these statistics.INVST = annualcapital expenditures. One would expect the estimates from the two approachesto differ.the results from equation(5) were used to constructdistributed lags for the independentvariables. GPLANT = book value of gross plant. Interest . IFIN = internal finance. the estimates are based on variationwithin the firms.Table 1 shows that the coefficients almost always had the sign predicted by the theory and were statistically significant at the 5 percent level for the majorityof the industries. are not correctedfor differences in firm averages. The estimated coefficients from equation(5) were normalizedto sum to unityand thenused as lag weights. Using this distributedlag specification. The investmentequation was estimated using the lag weights discussed above.THEORIES KALECKI OF AND KEYNES INVESTMENT 183 Table 1 Results of separateINVST regressions for 2-digit SIC industries Independent variable SALES IFIN INTEXP GPLANT Significant* coefficients withcorrect sign 13 15 20 20 Insignificant coefficients withcorrect sign 12 1 0 0 Insignificant coefficients withincorrect sign 5 1 0 0 Significant coefficients withincorrect sign 0 3 0 0 Notes: SIC = StandardIndustrialClassification. It is evident from Table 2 that sales is much more importantfor explaining changes in investment across time than for explaining changes between firms. presentedin Table2.

184 JOURNALOF POST KEYNESIAN ECONOMICS Table2 INVST Regressions by year Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 SALES -.094 .359 .044 -.250 -.080 .403 .128 -.215 -. however.101t -.0066 -. IFIN = internal finance.043 . utilization. GPLANT = book value of gross plant.071 . V. This suggests that internal finance is quite importantfor explaining why different firms invest different amountsat any point in time.0045 -. however.SALES = net annualsales.50. Conclusion The resultsof this studyare favorableto the investmenttheorypresented in section 2.455 . has a very strong effect in the cross sections.and othersthathas not often been . The internal finance variable. since it is a prediction of the investment theoriesof Kalecki. tCoefficients not significantlydifferent from zero at the 5 percent level.086 .078 Note: INVST = annualcapital expenditures.01 t -.243 -. The strong. or acceleratorvariablesare signficiant in explaininginvestment through time.248 -.093 -.0005t -. INTEXP = net annualinterestexpense.0004t .0023 -.367 .087 .471 GPLANT .341 .0093 . independenteffect of internal finance is more interesting.481 . Steindl. The elasticities evaluatedat sample means for each year range from 0.049 .32 to 0.100 . Minsky.0012t -.041 .432 -.0093 Estimatedcoefficientof: IFIN INTEXP .0065 . Our results reaffirm the common conclusion of other investmentstudies that sales.0020t .076 .333 .0031t -.330 -.505 .440 .385 .077 .443 .091t -.0010t -.0019t . expenses also have a stronger effect in the "within" regressions althoughthe coefficients all have the expectednegative sign in the cross sections.162t -.078 .099t 1982 -. All three hypotheses derived from the investment model are consistent with the empiricalanalysis.

. theoretical foundations. in Thenegative is effectof interest expense alsoevident theestimated equations. others theavailability of financeplays a basic role in the determination macroeconomic performance.13 Also. '3See Fazzari and Athey (1986) for an analysis of the importanceof financing variables in neoclassical and acceleratorinvestmentspecifications. the analysisof separate cross sections over time could be further withvarious refined studyhow investment to relations cyclical change in to characteristics the economy.it will be interesting intethe empiricalinvestmentspecificationdevelopedhere into grate of broader macroeconomic modelsto considerthe implications this workfor macroeconomic and stability policy design. for analTheseresultshaveimportant implications macroeconomic is as in whichinvestment recognized a in theKeynesian tradition. by or First.Therefore.Thestrong obtained duein partto theuse results of interest firms'ongoingfinancial posiexpenseas a flow measuring is variables. since this paperfocuses on the Kaleckian post-Keynesian the results shouldbe tested directly theoriesof investment alone. resultspresented reinforce arguments of and that Kalecki. ysis of fundamental determinant the level of aggregateactivity. this paperreestablishes empiricalinvestment of basedon the theoretical tradition KaleckiandKeynesas a serious alternative the conventional to that approaches havecome to receive in wideracceptance the recentliterature.Minsky.Finally. Davidson. thesample a muchmore turbulence drawn froma periodin whichfinancial played covered most role thanin thetimeperiod by important in theeconomy earlierstudies. an model Overall. especially againstthosebasedon alternative the neoclassical and theoryof optimalcapitalaccumulation financial of in of theories investment the tradition Tobin's"q" theory.Firms' conditions have a signficiant financial impacton the level of investof the here the ment. to Othershave attempted isolatean effect of this kind are withlittlesuccess.OF AND KEYNES THEORIES KALECKI INVESTMENT 185 from outputeffects in otherempiricalinvestment redistinguished search. resultsare quitestrong The andtheysuggestthe needfor a renewed effortto empirically compare the implications the Kaleckian post-Keynesian to of and alternatives otherapproaches. tionrather theuseof stockliquidity than Also.Keynes. Severalextensions suggested this paperfor future are research.

. New York: Kelly. 1963. Kalecki. GraduateSchool of Business Administration. 440447.2nd ed. The General Theoryof Employment. "Estimationof Linear Models with Crossed-Error Structure." Reviewof Economicsand Statistics. 13-63. and Athey.June 1986. T.and Prediction.. 1964. The Theoryof Economic Dynamics. 1971. 49.: National Bureauof Economic Research. "Investmentin the 1970's: Theory. Paul A. .186 JOURNALOF POST KEYNESIAN ECONOMICS REFERENCES Anderson. Dale W. George G. 1969. "The Principleof IncreasingRisk. "EconometricStudies of InvestmentBehavior: A Survey. 1971." AmericanEconomicReview. E. Raymond. and Foot. 63. 1937. 1979. 49-55. Goldsmith.Interest. A. Steven. 2. Keynes." Reviewof Economics and Statistics. Bischoff. 1969. Ed. 67-78. 1936. Performance." In TimeIncentives and Capital Spending.HarvardUniversity Press. John M. Locke. Luktepohl. Evans.New York:Harperand Row.. . . Davidson. W. by Gary Fromm. Cambridge: CambridgeUniversity Press." AmericanEconomic Review. 53. Coen. 53. 73-124. 1978. Jorgenson. Griffiths. Peter. and Battese. Factors in Business Investment. Elliot.Mass. and Sweezy. 4 (new series). Judge. New York: MonthlyReview Press. Michael. 247-259. .Boston: Division of Research. 1971." Economica. "Investmentin ImperfectCapital Markets:Financing Constraintsand the Neoclassical Model. 151-164. and Lee. "A Study of IndustryInvestmentDecisions." In Determinantsof InvestmentBehavior. Robert M. 1971. Hill. "Business Investmentin the 1970's: A Comparisonof Models.: Brookings. 1972. . Michael. R." Workingpaper. 1111-1147.London: Macmillan. C. Paul A."Journal of Econometrics. 195-207." Brookings Papers. Clark. 1958. C.H. Selected Essays on the Dynamics of the Capitalist Economy 1933-1970. 1966. The Theory and Practice of Econometrics. W.James S. CorporateFinance and Fixed Investment. S. "The Theory of InvestmentBehavior. MacroeconomicActivity. 1985. 9. "The Effect of Cash Flow on the Speed of Adjustment. W. Eisner. Michal. "Capital Theory and InvestmentBehavior. E. Business Cycles and Economic Growth. 1973.New York: National Bureauof Economic Research. Moneyand the Real World. Robert. . "The OtherHalf of Gross Investment:Replacementand ModernizationExpenditures. Washington. Baran. M. and Money. The Flow of Capital Funds in the Post-WarEconomy.C. 1965. pp. New York: National Bureauof Economic Research. by Robert Ferber.. G. 1967. 1967. MonopolyCapital. J. London: Macmillan. New York:John Wiley & Sons. Feldstein. 1974.. A. K. Fuller.. New York: McGraw-Hill..D.Cambridge. Ed. pp. Fazzari." Journal of Economic Literature. Duesenberry. 1971. Paul. Charles. "Theories of CorporateInvestmentBehavior Revisited." Brookings Papers.

1964. 1957. EconomicForecasting. Kalecki's Principleof IncreasingRisk: The Role of Finance in the PostKeynesianTheory of InvestmentFluctuations. Adrian. James G. Meyer. . Cambridge:CambridgeUniversity Press. Steindl. John. Edwin. New York: ColumbiaUniversity Press. 1975. 322-333. John MaynardKeynes." Reviewof Economicsand Statistics. 1963. Tracy L.Ph. StanfordUniversity." Journal of Political Economy. Mott.Harvard University.AND KEYNES THEORIES KALECKI OF INVESTMENT 187 Kuh.Mass. "Kalecki's Principleof IncreasingRisk and the Relation Among Mark-upPricing. 1986. InvestmentFluctuations. 1963. Minsky. Firms: A QuarterlyTime Series Analysis of Resek.D. Edwin. 1975.: HarvardUniversity Press. Wood. John. InvestmentDecisions. GraduateSchool of Business Administration. Hyman P. Josef. 48. 71. A Theoryof Profits. Boston: Division of Research. and Glauber. Amsterdam:North Holland. dissertation. New York: MonthlyReview Press. Meyer. 441-456. and Kuh. 1982. Cambridge. . 1966. Maturityand Stagnationin AmericanCapitalism.and Liquidity Preference. Capital Stock Growth:A Micro-Econometric Approach. 15. Robert. 65-76. 1976." EconomicForum. "The Microfoundations the Social InvestmentFunction. and Public Policy. of Witte. "Investmentby Manufacturing IndustryData. The InvestmentDecision.Robert.

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