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8/3/2019 The Investment Theories of Kalecki and Keynes
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The Investment Theories of Kalecki and Keynes: An Empirical Study of Firm Data, 1970-1982
Author(s): Steven M. Fazzari and Tracy L. MottReviewed work(s):Source: Journal of Post Keynesian Economics, Vol. 9, No. 2 (Winter, 1986-1987), pp. 171-187Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/4538001 .
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STEVEN M. FAZZARI and TRACY L. MOTT
The investmenttheoriesof Kalecki
andKeynes: an empiricalstudyof
firm data, 1970-1982
I. Introduction
In the 1930s, JohnMaynardKeynesand Michal Kaleckiindependentlypresented heoriesof firm behaviorthatemphasizedeffective demand
and financialconditions as primarydeterminantsof investment. This
theoryhas been extendedby JamesDuesenberry 1958), JohnMeyerandEdwinKuh(1957), Hyman Minsky(1975), Josef Steindl(1976),and others. It differs from the neoclassical theoryof optimal capitalaccumulation, n which investment s modeled as the adjustmentof a
capitalaggregateto an
optimallevel, assuming
profit-maximization,perfect competition, and well-behaved neoclassicalproductionfunc-
tions. Rather, n KeynesandKalecki, investmentin fixed capitalpri-
marilydependson a firm's demandexpectationsrelativeto its existing
capacityandits abilityto generate nvestment undingthrough nternal
cash flow and externaldebt financing.This paperanalyzesthe determinantsof investment from the per-
spectiveof KeynesandKaleckiusinga largesampleof U.S. manufac-
turingfirm datafrom 1970to 1982. Thehistoryof estimating hiskindof investmentmodel began with Kalecki's own work (see Kalecki,
1969), but the firstextensiveeconometricstudyalong these lines was
Meyerand Kuh's TheInvestmentDecision (1957). Subsequent cono-
The authorsare Assistant Professorsof Economicsat WashingtonUniversity,Saint
Louis, and the Universityof Colorado, Boulder,respectively.They would like tothankPaul Davidson, ArthurDenzau, EdwardGreenberg,DonaldHarris, and
Hyman Minskyfor helpfulcomments and suggestions.
Journal of Post Keynesian Economics//Winter 1986-87, Vol. IX, No. 2 171
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172 JOURNALOF POST KEYNESIAN CONOMICS
metricworkusingwhatMeyerandKuhcalled the "accelerator-residu-
al funds hypothesis" was undertakenby Meyer and Glauber(1964),Kuh(1963), Anderson 1964), Resek(1966), andEvans(1967), amongothers. Coen (1971) analyzed he effect of cash flow on the adjustment
speed of actual to desiredcapital.The theorywas amongthe alterna-
tives tested in several comparativestudies of empirical investment
functions (see Jorgenson, 1971; Bischoff, 1971; Elliott, 1973; and
Clark, 1979), but it has beenovershadowedn recentyears by neoclas-
sical models or models basedon JamesTobin's"q" theoryof invest-ment.
The empiricalresults obtainedwith the accelerator-residual unds
model havebeencriticized on the grounds hat the flow variablesused
torepresentiquidity,such asprofitsor cashflow, succeedonlybecause
theyarehighlycorrelatedwiththeoutputor sales variables hatappearin neoclassicalinvestmentmodels. This studyaddresses his criticism
directly by includingboth sales and flow
liquidityvariablesin the
estimatedequations.Thisapproachmaynothave beensatisfactory or
earlier studies thatusedaggregate ime seriesdata,becausecollinearityand small samplesizes made it difficult to distinguishclearlybetween
the independenteffects of liquidity and acceleratorvariablesin time
seriesregressions. Using a large pooledtime series cross-sectionsam-
ple, however,we obtainedresultsthatclearly ndicatea strong ndepen-dent influence for internalliquidityon investment,even when sales
variablesare included n the equation.This supportsan importantpartof the Kaleckianandpost-Keynesian heorythat has not fared well in
some other studies.2
Anotherdifficulty with the earlierempiricalanalysesof Kaleckian
and post-Keynesianinvestmentmodels and the comparativestudies
cited above is thatthey used datageneratedprimarily n the 1950s and
1960s. The generally tranquilexpansionthat characterized he U.S.
economy from the KoreanWar to the late 1960s resulted in data thatshowed little of thevolatilitywhich is centralto post-Keynesiannvest-
ment theory.In the 1970s, however,the environmentchanged. The
1'"Ouroverall conclusion is thatwhere internalfinance variablesappearas sigificantdeterminantsof desiredcapital, they represent he level of output" (Jorgenson,1971, p. 1133).
2Steindl(1976, pp. 129-130) specifically recognizesthis point. He writes that time
series studies of investmentuse "a particularlyhazardousprocedure .. since utili-zation in practiceis very closely correlatedwith profits" (p. 129). He proposesacross-sectionalstudyof investmentsimilar to what we presentin this paper.
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INVESTMENT HEORIESOF KALECKIAND KEYNES 173
amplitudef fluctuationnsales,prices,and inancial onditions reat-
ly increased, ausing ignificant ariabilityn data hathadbeenrela-
tivelysmooth verthepreviouswodecades.Therefore,weexpect he
distinguishingeatures fthepost-Keynesianpproachoemergemore
clearly n theanalysisof therecentdata han n earlierstudies.Theresultspresentedereareconsistentwith hreemajor mpirical
hypothesesdentifiedwiththepost-Keynesianiew:(1)capacity tili-zationor sales variableshave a positiveeffect on investment;2)
variablesmeasuringnternallygenerated inancefor firms have astrongpositiveand ndependentnfluence n firm nvestmentxpendi-ture;and(3) the largerthe interestcommitmentsf firms, ceteris
paribus, he lower their nvestment.Theseresultsholdupin the full
sampleandin various ubsamples.The remainder f this paper s organizedas follows. Section2
summarizeshe theoreticalramework. ection3 presentshespecifi-cationof themodelwe estimate nddiscusses he
empiricalechniqueswe use. Theregression esultsappearn section4.
II. The investmentmodel
Keynes(1936, chapter11) linked he demandor investmento the
marginal fficiencyof capital,or,equivalently,he demand ricefor
capital.Thedemand rice PD) s defined s thepresent alueofprofit
flows a firmexpects o earnfroma marginalnvestmentxpenditureafterdeducting inancing osts. The level of investmentwill settlewhere hedemand riceequalshesupply rice hefirmmustpayfor a
marginalnvestmentPs). Onedeterminantf PDis somemeasure f
output emand.nthe relevantiterature,he variablemostcommonlyused scapacity tilization.3 hereasonorthis s straightforward.hedirecteffectof investments onoutput apacity.Firmswant o main-tainsufficient
apacityo meet
forthcomingemand.
However,apac-ity involvescarrying osts.Excesscapacity elative o demand aisesthesecosts andreducesprofits.Investmentlansmust,therefore,be
closely inkedwithprojected emand elative o currentapacity, ndthisprojection ill bebasedonobservedevelsofcapacity tilization.4
3Steindl 1976, pp. 107-113, 127-130) arguesthat utilization is the primedetermi-
nant of expected profitabilityand thus an essentialdeterminantof investment. Simi-
lar argumentscan be found in Baranand Sweezy (1966, pp. 82-88) and Kalecki
(1971, pp. 1-14).4Usingthis framework,we see that the determinantsof the demandfor replacementinvestment are essentially similar to the determinantsof net investmentdemand.
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174 JOURNALOF POST KEYNESIAN CONOMICS
Keynes(1936, p. 136 andchapter16)alsopositeda fall inthe return
on investment(andthus a fall in PD)as investmentrises, becausethedeclineinthescarcityof capitalreduces hequasi-rent arnedby capital
(see also Davisdon, 1972, pp. 72-73). Othershave linkedthe fall inPDas investment ncreasesdirectlyto firms' perceptionsof limitedoutputmarkets.5Following Steindl(1976), it is assumedthatexcess capacityexists in capitalgoods industries;hence, the costs of producing nvest-
ment goods will not be significantlyaffectedby changinginvestment
levels. Thisimplies
thatdPs/dl
isapproximately
ero.
The demandprice for investmentalso dependson financial condi-
tions.6 A firm's investmentprogramcan be financedwith fundsgener-ated by its own cash flow, or the firm can finance its expenditures
externallyby takingondebt andsetting upcashpaymentcommitments.
Let F, denote the amountof internal cash flow the firm can use to
finance investment. It can invest up to I = F1/Ps without additional
borrowing.AnyinvestmentexceedingImustbe financedexternally,so
thatmarginalexpendituresbeyondI createnew interestobligationsforthe firm.7
There are several reasons why the cost of financing investment
externallywill riseas the level of investment ncreases.Kalecki(1937;1971, pp. 105-109) argued or a "principleof increasingrisk," claim-
ingthat themarginalrisk of fixedcapital nvestmentrises with the level
of investment.This implies that lenders will demandhigher interest
rates as thelevel of a firm's investmentrises (see Mott, 1986). Keynes(1936, p. 144) analyzed a similar phenomenon, which he called
"lender's risk," that "may be due to moral hazard, i.e. voluntarydefaultor othermeansof escape, possiblylawful, from the fulfillment
of obligation,or to thepossibleinsufficiencyof themarginof security,i.e. involuntarydefault due to the disappointmentof expectations."These ideas have been extendedby Minsky(1975), whoemphasizes he
This is consistent with the results of Feldstein and Foot (1971) and Eisner (1978),which show thatreplacementand modernization nvestmentare positively correlated
with investmentfor expansion,althoughthey are less variable.
5SeeDuesenberry 1958, pp. 49-85), Kalecki(1971, pp. 110-123), Mott (1982, pp.46-49), and Steindl (1976, pp. 122-124).
6SeeKalecki (1937; 1971, pp. 105-123), Keynes (1936, especially chapters11 and
12), Davidson (1972, chapter4), and Minsky(1975, chapter5).
7Wedo not consider the possibilityof investmentfinancethroughnew equityhere
since this has been shown to be insignificant.See Goldsmith(1965). Thoughnewequity reducesthe risk of illiquidity, it is more costly to the existing shareholders
thanborrowing.See Kalecki(1937; 1971, pp. 105-109) andWood(1975).
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INVESTMENT HEORIESOF KALECKIAND KEYNES 175
relationshipbetweeninternalcash flow and contractualpaymentcom-
mitments as akey
determinantof thefinancing
terms a firm can ar-
range. Minsky arguesthata well-structuredbusiness loan is basedon
the lender's expectation hat the debt can be serviced from the future
incomegeneratedbya firm'soperations.The "marginof security"for
the loan is the amountby which the firm's expectedincome exceeds its
total contractualpaymentcommitments.Clearly, he lower the level of
internalfinance, the lower the marginof securityfor loans, and the
greater he riskpremium helenderwill require.Theresultis similarto
Kalecki's. As investmentincreases, holding the firm's financial re-sourcesfixed, lenderswill requirea higherinterestrate to compensatefor the increasingriskof default. This lowers the firm's demandpriceof investmentas the level of investment ncreasesbeyondwhat can be
financedinternally.The extent to whichfinancingcosts rise with investmentwill depend
on the bankers'appraisalof a firm's abilityto carrymarginal ncreases
in debt. Thus,PD will fall faster with increasing nvestment,themoreheavilyleveragedthe firm is. The key measureof the firm's abilityto
carrymore debt is the "marginof security,"which is linkedtothe level
of a firm's interestobligationsor cash commitments CC). The higherCC,otherthings equal,thelower themarginof securityandthegreaterthe increasingrisk problems.
Equation(1) gives our specificationof the effective demandpricefor investment faced
byan individualfirm.
(1) PD = PD(I, U, Fi,/Ps, CC)
Increasesin investment(I) or cash commitments CC)reduce the de-
mandprice. Risingcapacityutilization(u)or an increase n the invest-
mentgoods thatcan be purchasedwith internalcash flow (FI/Ps) will
increase the demandprice. EquatingPs and PD gives a structural
relationthat determines a representative irm's investment:
(2) PD(I*, FI/Ps, CC) = Ps,
whereI* represents he investment evel the firm chooses. Solvingfor
I* gives a reducedform for investment,
(3) 1* = I(u, FI/Ps, CC),
that is the basis of the empiricalanalysisthat follows.
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176 JOURNALOF POST KEYNESIAN CONOMICS
PoDPS
PS
I IlI "Dl P (I,u, FI/P, CC)
I I
I= F/P/ i* I
Figure1
The model is presentedgraphicallyin Figure 1. An increase in
capacity utilization shifts the PD curve outward and increases 1*.
As FI rises, the PD curve also shifts out horizontallybecause a
greater internal cash flow means that more investment can be fi-
nanced without resorting to external funding. Holding FI con-
stant, however,we see that variations n CC affect the demandpriceof investment somewhatdifferently.For investment financed intern-
ally CC makes little difference. But highercash commitmentsresult-
ing from the financingof past projects increase the risk of new in-vestment beyond the level that can be internally financed. Thus,
higher CC makes the PD curve fall faster beyond 7, and I* is re-
duced.8
8Notethat, althoughthe analysisis presentedas if the firm exhaustsits entire flow
of internalfinance before it borrows, such a strongassumption s not necessary.Themainpoint is thatthe cost of finance facedby a firm will rise as debtpaymentcom-
mitments ncrease relative to internal cash flow availableto service the debt. If afirm takes on debt to finance a projectthat it could have financedout of internal
funds, we wouldnot expect it to face serious increasingrisk problems, so the PDcurve will not fall significantlyuntil after7 is reached.
This analysisfollows Davidson(1972, chapter4) by integrating inancial condi-tions into the demandprice for investmentgoods. Otherauthorshave modeled fi-nancial constraints hroughthe supplyof funds firms face. Then, the supply priceincludes the capitalizedvalue of financingcosts as well as the purchaseprice of in-vestmentgoods. See Duesenberry(1958, pp. 49-112), Evans(1969, pp. 73-105),
Minsky(1975, pp. 93-116), andMott (1982, pp. 37-59). Bothapproachesresult in
the same empiricalinvestmentequation.Therefore,the distinctionis not crucial forthe purposesof this paper.
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INVESTMENT HEORIESOF KALECKIAND KEYNES 177
III.Empiricalspecification
Threeempirical mplicationsof the modelpresented n the last section
are tested here:
(1) thepositiverelationbetween nvestmentandcapacityutilization
(u),
(2) the positive relation between internal finance (F1)and invest-
ment,
(3) the negativerelationbetween cash paymentcommitments CC)and investment.
Each of thesepropositions ollows directlyfrom the modelinsection2.
Thebasic investmentequationestimatedin thepaperis a linearized
version of equation(3):
(4) INVST = ao + a1 L(SALES) + a2 L(IFIN)+ a3 L(INTEXP) + a4 (GPLANT).
The variable definitions are:
INVST: annualcapital expenditures,SALES: net annualsales,
IFIN: internalfinance, defined as after-taxprofits plus
depreciationallowances minus common and
preferreddividends,INTEXP: net annual interestexpense,
GPLANT: book value of gross plant.
The L functionson SALES, IFIN, and INTEXP represent ags, the
form of which is discussed later. The remainderof this section dis-
cusses the connectionbetweentheempiricalvariablesand the theoreti-
cal model, the econometricestimationtechniques,and the datasampleused.
Themodelpresented n thelast sectionlinkedthedemand orinvest-
ment to capacityutilization. The best way of incorporatinghis effect
into an empiricalinvestmentequationwould be to includea capacityutilizationvariable.However,no acceptablemeasureof capacityutili-
zation is available or the individual irmdatawe use. It is notpossible
todetermineoutputcapacity rom financialdata.Capacityutilization sproxiedby sales data n theempiricalspecification.Variationsn sales
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178 JOURNALOF POST KEYNESIAN CONOMICS
are highly correlated with variationsin utilization, so this approach
shouldyield acceptableresults.The analysis n section2 also identifies an independent ffect of the
level of internal inance(F1)on investment.ThemeasureusedforIFIN
is the flow of funds availableto firms to finance capital expenditure:after-taxprofitsplus depreciationallowances minusdividends.In our
regressions,IFINis laggedto account or thetime between nvestment
decisions and actualexpenditure.
Laggedinterestexpense(INTEXP)is used to estimate the effect ofcontractualcash paymentcommitments CC). In past studies of post-
Keynesian nvestment heory,this effect was usuallymodeledby vari-
ables thatrepresentedhe stock of liquidassetsor the stock of debt(see
Meyer andKuh, 1957, and Meyer and Glauber, 1964, for example).However,following Minsky(1975, chapter5) our model emphasizesthe importanceof theflow of committedcash flows as the relevant
constrainton investment inance. The resultsin the next section show
that this approach esultsin a moresuccessfulempiricalspecification.The GPLANTvariable s includedin equation(6) for econometric
reasons. Because individual firm data are used, investmentwill be
positivelycorrelatedwith all the independent ariablessimplybecause
all the financialdatawill tendto be largerfor largerfirms. By includ-
ing thebook valueof gross planton the right-hand ide of equation(4)as a measure of the overall size of the firm, we can interpretthe
estimated coefficients of the otherindependentvariablesas the effecton investment,holdingthe size of the firmconstant.Since GPLANT
only proxies the size of the firm, it was not lagged in the estimation
equations.In time series studies that use small samplesof quarterlyobserva-
tions, some kind of lag distribution s often imposed to reduce the
multi-collinearitycausedby includinghighly correlated ags in a re-
gression. With the data set used here, this kind of multi-collinearitywill be less seriousbecausethepooledtime seriescross-sectionsampleof over 9,000 observationsimproves the ability of a regression to
distinguishthe effects of correlatedexplanatoryvariables.For these
reasonscontemporaneousndlaggedvaluesof thevariablesare entered
as separate egressors n ourestimatedequations,unconstrained y anydistributed ag assumptions.
The contemporaneousvariablesfor IFIN and INTEXP have been
omitted to avoid a possible simultaneitybias. Because all investmentmust be financed somehow, either internallyor externally,current
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INVESTMENT THEORIES OF KALECKI AND KEYNES 179
investment s closely linkedto current inanceby definition.Omitting
the contemporaneousinance variablesfromthe regressionandusingonly lagged values alleviates this problem.9
Lags up to five years' lag were consideredfor each variable. The
most interesting comparison s obtainedbetween the resultswith two
and three ags. Theestimatedcoefficientonthe third agof SALESwas
positive, but quite small. When a third lag was added for IFIN and
INTEXP,their estimated coefficients had the opposite sign from the
coefficientson the firsttwo lags. The magnitudeof the coefficientsforthe first two lags also increased, so the sum of the coefficients, an
estimateof the responseof investmentto a permanentchange in the
independent ariables,wasnotsignificantlyaffectedby includingmore
lags. These resultsindicatemulti-collinearityamongthelongerlags of
IFIN andINTEXP.Also, the estimatedregressionwith two lags had a
lower root mean squarederror than the equationwith threelags. For
these reasons, the resultsreported n the next section include two lagsforeach variable.The conclusionsdrawnarenotaffectedby including
longer lags.Severaleconometricproblemsarise when using pooled cross-sec-
tion time series data to obtain regressionestimates. The time series
variationfor individualfirms often generatesserial correlation n the
errorterms, while the cross-sectionvariationamongdifferentfirms is
likely to causeheteroscedasticity.Theresidualsfrom anordinary east
squares(OLS)regression usingthe specificationof equation(4) showbothof these characteristics.Thereforewe usedan estimatedgeneral-ized least squarestechniqueto obtainmore efficient estimates.
The techniqueis based on the assumption hat the errorterms 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 vithas a zero meananda
variancea thatdependson the firm. This error term allows for both
serialcorrelationandheteroscedasticity.Theequationswereestimated
usinga three-stageprocedure.First we used the residuals(eit) from an
OLS regressionto estimate Qi as
Qi=iite eit-hi/ sEi t-i
t=2 t=2
9We are indebted to Joel Prakken for making this observation.
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180 JOURNAL OF POST KEYNESIAN ECONOMICS
whereT s thenumber f observationsnthetimeseries or each irm.
Thenwe obtainedheresidualsvit)froma transformed LSregres-sionin whichall variablesXitwerereplaced yXit - iXit-l. Usingthe vit residuals, we estimate u2by
1 T
S2=
2S t'T- 1 t=2
ThetransformedataweredividedbySi to correctheteroscedasticityin the finalregression.A moredetailedanalysis f thisapproachndfurther eferenceso theeconometriciteraturemaybe found nJudgeet al. (1985,pp. 485-490).
The data were drawnfrom the COMPUSTATnnual ndustrial
tape.0Data or U.S. manufacturingirms(2-digitSIC-Standardn-
dustrialClassification-codesbetween20 and39) were used for theyears1967-1982.The data rom 1967-1969wereusedonlyfor con-
structingaggedvariables,o theregressionsseinvestment ata rom1970-1982.A firm'sobservationoran individualearwas excludedfromthe sample f oneof the following hreeconditions rose:
(1) firmdatawere notupdatedor theyear,(2) thedata eflected majormerger racquisitionor theyear,or
(3) anecessary ata temwasreportedsnotavailableortheyear.The autocorrelationorrectionprocedure equireshat the dataforeach irmconstitute continuouseries ntime,andonly irms hathadat least six time series observationswere included.All datawere
adjustedor inflation ydividingbythe mplicitpricedeflatororU.S.
grossnational roduct.The otal ample ontained,391observations.
IV. Empiricalresults
Theexplanatoryowerof the investmentheorypresentednsection2isgenerally uitegoodforourempiricalpecificationnddata ample.All threepropositionset outat thebeginning f section3 are well
supportedn regressionsrun over the whole sampleand various
subsamples. heregressionshowa positiverelationbetweennvest-ment and the variables epresentingales and internal inance.The
'°Standard and Poor's COMPUSTAT service maintains extensive financial data for
individual U.S. and Canadian firms.
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INVESTMENT HEORIESOF KALECKIAND KEYNES 181
interestexpensevariableshave the expectednegative sign in our esti-
matedequations.The estimatedequationfor the full sample is:
(5)
INVST = .0185 (SALES) + .0025 (SALES-1) + .0033 (SALES_2)
(16.7) (1.6) (2.3)
+ .171 (IFIN_1) + .058 (IFIN-2) - .423 (INTEXP_1)(16.6) (5.4) (012.5)
- .364 (INTEXP_2)+ .144 (GPLANT)
(9.4) (48.8)
- .059 (D71) - .033 (D72) + .003 (D74) - .037 (D75)
(4.7) (2.7) (0.2) (1.4)
- .023 (D76) - .011 (D77) - .025 (D78) + .025 (D79)(3.1) (1.9) (0.9) (2.1)
+ .055 (D80) + .091 (D81) - .004 (D82)
(4.51) (7.2) (0.3)
(t statistics in parentheses)
This equationincludes "fixed effects" thatallow separate nterceptsfor each firm and each year. The annualinterceptsare reportedfor
1971 through1982 as the coefficients on the variablesD71 throughD82. These coefficients are relative to a zero value for 1970. The
interceptsfor each of the 835 firms in sample are not reported in
equation(5). The elasticitiesof investmentwithrespectto a 1 percent
permanent ncrease n the independent ariables,evaluatedat the sam-
ple means, are .32 for SALES, .21 for IFIN, and -. 16 for INTEXP.The positive andsignificantcoefficient on SALESis not surprisingsince outputor acceleratorvariableshave been foundto have explana-
tory powerin investmentequationsbasedon a widevarietyof theoreti-
cal foundations.The results for IFIN are striking,however,since the
estimatedequationshows a strongand independent ffect for internal
finance eventhough t is includedwith sales in theregression.Withthis
specification,it is unlikelythatIFINactsonlyasaproxyforoutputor a
sales accelerator.Thenegativecoefficientson the lags of INTEXPare also consistent
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182 JOURNALOF POST KEYNESIAN CONOMICS
with thetheory presentedearlier.Holdingthe other variablesconstant,
we find higher lagged interestexpensesindicate thata greaterpropor-tion of thefirm's cash flow is committed o debt serviceand, therefore,it is more risky to finance the firm's investmentexpenditures.The
strengthof the effect is particularly nterestingsinceotherstudieshave
had little success in obtainingstatisticallysignificantresults for vari-
ables used to represent imilareffects.1 There are twoexplanations or
the relativestrengthof our interestexpensevariable.First, otherstud-
ies oftenfocusedon stock measuresof debt burden suchas the stockoflong-termdebt, for example). But as Minsky (1975, chapter5) has
pointedout, the key to "validating"the liabilities a firm incurs is for
the firm to generatesufficient cash flow to meet its ongoing commit-
ments.Thus, with otherthingsheldconstant,highlevels of committed
cashflows, thatis, highinterestexpenses,will constrainnvestment,as
the results indicate.12The second explanation or the significanceof
the INTEXP variable is that thesample
used here is drawnfrom a
period (1970-1982) with much greaterfinancial turbulence han the
sample periodsused in earlier studies. More attentionwill be paidto
theadequacyof internalcashflow to meetpaymentcommitmentsn an
environmentwhere the riskof defaultis higherandthe terms available
for investmentfinancingare less stable.
It is also interesting o examinethepatternof the annual ntercepts.
They tend to move pro-cyclically,althoughthey generallylag some-
what behindchangesin GNP.The variationexplainedby theseshiftingintercepts s not trivial. For example, the changefrom 1974 to 1975
explainsa4 percentdropin investment,evaluatedatthesamplemeans.
These resultsimplythatthere s greatercyclicalvariationn investment
than can be accountedfor by changes in the independentvariables
alone. This may be explainedby "animalspirits," or it could be the
result of othercyclical influenceson investmentnot accounted or by
our model. In any case, this issue deserves further nvestigation,par-ticularlywith datathat could be used to analyzethis effect over short
periods, such as calendarquarters.To confirm the results from the pooled time series cross-section
regressions,theequationwas estimatedseparately or eachindustry n
the sample. Industrieswere divided by two-digit SIC codes. Because
"See, for example, Meyer and Kuh (1957, pp. 117-121) and Meyerand Glauber
(1964, pp. 88-94).'2As in otherstudies, we found little significancefor stock measuresof debt in our
investmentequation.
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INVESTMENT HEORIESOF KALECKIAND KEYNES 183
Table 1
Results of separateINVSTregressionsfor 2-digit SIC industries
Significant* Insignificant Insignificant Significantcoefficients coefficients coefficients coefficients
Independent withcorrect withcorrect with ncorrect with ncorrectvariable sign sign sign sign
SALES 13 12 5 0
IFIN 15 1 1 3
INTEXP 20 0 0 0
GPLANT 20 0 0 0
Notes: SIC = Standard ndustrialClassification;INVST = annualcapital expenditures;SALES = net annualsales; IFIN = internalfinance;INTEXP = net annual interestexpense;GPLANT = book value of gross plant.
*A 5 percentsignificancelevel was used for these statistics.
the samplesize for eachof the 20 industries s much smaller than the
aggregatepooled sample,multi-collinearityposedmore of a problem.
Therefore,theresultsfromequation(5) were usedto constructdistrib-
uted lags for the independentvariables. The estimated coefficients
fromequation(5) werenormalized o sum to unityand then used as lag
weights. Usingthis distributedag specification,we estimatedseparate
equationsfor each industry.Table 1 shows thatthe coefficientsalmost
always had the sign predicted by the theory and were statisticallysignificantat the 5 percentlevel for the majorityof the industries.
For the finalempiricaltest, thesamplewas dividedinto 13 separatecross sections for the years 1970through1982. The investmentequa-tion was estimatedusing the lag weights discussed above. These re-
gressionsrequirea somewhatdifferentinterpretationrom the results
presentedso far.Thepooledcross-sectiontime serieswithfirm-specif-
ic interceptsuses data correctedfor differences in the mean valuesbetweenfirms. Therefore,the estimatesare basedon variationwithin
thefirms. Thepurecross-sectionresults,presented n Table2, arenot
correctedfor differencesin firm averages, so the estimatesare based
on variationsbetweenfirms. One wouldexpect the estimatesfrom the
two approaches o differ.
It is evident from Table 2 that sales is much more importantfor
explaining changes in investment across time than for explaining
changesbetweenfirms. The sales coefficients are small andhave un-
predictable signs in the pure cross-section regressions. Interest
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184 JOURNALOF POST KEYNESIAN CONOMICS
Table2
INVST Regressions by year
Estimatedcoefficientof:
Year SALES IFIN INTEXP GPLANT
1970 -.0020t .505 -.01 t .049
1971 .0093 .367 -.248 .043
1972 .0004t .455 -.091t .0411973 .0005t .440 -.128 .094
1974 -.0031t .403 -.330 .080
1975 -.0019t .341 -.250 .076
1976 .0023 .333 -.215 .071
1977 -.0012t .359 -.093 .077
1978 -.0010t .385 -.243 .078
1979 -.0045 .443 -.162t .087
1980 -.0066 .481 -.101t .086
1981 -.0093 .471 -.099t .0441982 -.0065 .432 -.100 .078
Note: INVST = annualcapital expenditures;SALES = net annualsales; IFIN = internal
finance;INTEXP = net annual nterestexpense;GPLANT = book value of gross plant.
tCoefficients not significantlydifferentfrom zero at the 5 percentlevel.
expenses also have a strongereffect in the "within" regressionsal-
thoughthe coefficients all have the expectednegativesign in the crosssections. The internal finance variable, however, has a very strongeffect in the cross sections. The elasticities evaluatedat samplemeans
for each year range from 0.32 to 0.50. This suggests that internal
finance is quite importantfor explainingwhy different firms invest
different amounts at any point in time.
V. Conclusion
Theresultsof this studyare favorable o theinvestment heorypresent-ed in section 2. All three hypotheses derived from the investment
model are consistent with the empiricalanalysis.Our results reaffirm
the commonconclusion of other investmentstudies thatsales, utiliza-
tion, or acceleratorvariables are signficiantin explaining nvestment
throughtime. The strong, independenteffect of internalfinance is
more interesting,however,since it is a predictionof the investmenttheories of Kalecki, Steindl,Minsky,and othersthathasnot often been
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INVESTMENT HEORIESOF KALECKIAND KEYNES 185
distinguishedromoutputeffects in otherempiricalnvestment e-
search.Thenegative ffectof interestxpenses alsoevidentntheestimat-
ed equations.Othershaveattemptedo isolateaneffectof this kindwith ittlesuccess.Thestrong esults btainedredue npart o theuseof interest xpenseas a flowmeasuringirms'ongoing inancial osi-tion ratherhan heuseof stock iquidity ariables.Also,thesamplesdrawn romaperiodn which inancialurbulencelayeda muchmore
importantole ntheeconomyhan nthetimeperiod overedbymostearlierstudies.
Theseresultshave mportantmplicationsormacroeconomicnal-
ysisin theKeynesianradition,n which nvestments recognizedsafundamental eterminantf the level of aggregateactivity.Firms'
financial onditionshave a signficiantmpacton thelevelof invest-ment.Therefore,heresultspresentederereinforceheargumentsf
Kalecki,Keynes,Minsky,Davidson,ndothers hat he
availabilityf
financeplays a basic role in the determinationf macroeconomic
performance.Several xtensions resuggested ythispaper orfuture esearch.
First, since this paperfocuseson the Kaleckian r post-Keynesiantheoriesof investment lone, the resultsshouldbe testeddirectly
against hosebasedon alternativeheoreticaloundations,speciallythe neoclassicalheoryof optimal apitalaccumulationnd financial
theoriesof investmentn the tradition f Tobin's"q" theory.13Also,the analysisof separate ross sectionsover time could be furtherrefined o studyhowinvestmentelations hangewithvarious yclicalcharacteristicsn theeconomy.Finally, t will be interestingo inte-
grate the empirical nvestment pecificationdevelopedhere intobroadermacroeconomicmodelsto consider he implications f thisworkfor macroeconomictability ndpolicy design.
Overall,this paperreestablishes n empiricalnvestmentmodelbasedon thetheoreticalradition f KaleckiandKeynesas a seriousalternativeo the conventionalpproacheshathavecome to receivewideracceptancen the recent iterature.The resultsarequitestrongand heysuggest he need or a renewed ffort oempirically omparetheimplications f the Kaleckian ndpost-Keynesianlternativesootherapproaches.
'3See Fazzari andAthey (1986) for an analysisof the importanceof financingvari-
ables in neoclassical and accelerator nvestmentspecifications.
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186 JOURNALOF POST KEYNESIAN CONOMICS
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