An empirical investigation of the relationships between money, interest rates,investment and output : a disaggregated approach

This dissertation undertakes an empirical assessment of investment behavior in the United States. The purpose of the research is to empirically examine the predictive power of money,interest rates, and outputs of aggregate fixed investment(TFI)and the disaggregated components of fixed investment,including business fixed investment(BFI)and residential fixed investment(RFI). This will help determine whether different types of investment respond differently to these variables. To allow for the endogeneity between interest rates,investment,and output an atheoretical vector error correction model(VECM)approach is used. To evaluate the stability of these results,this study uses both nominal and real short- and long-term interest rates.In general,results show that interest rates affect BFIand RFIdifferently.While these results show a similar negative relationship between TFIand BFIandinterest rates,findings display a positive relationship between interest rates and RFI.This creates potential masking effects. Results also show interest rates are a better predictor ofRFI,while output is a better predictor ofBFI.The second objective of this dissertation is to examine whether deregulation and financial innovations have altered the relationship between the money supply,interest rate,investment,and GDP. The analysis uses an error correction vector autoregression approach and splits the data into two relevant sample periods: pre-deregulation(1959.Q1 - 1979.Q4)and post-deregulation(1982.Q1-1998.Q4). The Explanatory powers of short-term and long-term interest rates for investment are compared. Results show that while RFIis more sensitive to short-term interest rates during regulation,it is more sensitive to long-term rates after deregulation. Similarly,deregulation alters the response of investment to changes in money supply. Results Also reveal that RFIis a better indicator of business cycles after deregulation.The last objective of this study is to consider the implications of these results for the recent competing macroeconomic theories regarding the effects of monetary policy upon investment behavior. This is a unique way to compare the market-clearing model and the non-market-clearing model. In general,results suggest that changes in money are non-neutral and that investment is a function of both interest rates and aggregate demand,thus supporting the predictions of the NMCmodel.