This paper examines the long-run relationship of investment-output ratio in selected
Asia-Pacific developing countries viz, Thailand, Philippines, Indonesia, Singapore, Fiji, Samoa and
Vanuatu. The paper uses the General-to-Specific (GETS) time series technique to analyze the data and
the results imply that there exists a cointegrating relationship between real investment-output
ratio, real income and the real interest rate.
Investment equations are estimated because they have implications for long-run
growth policies. Investment is the most volatile component of aggregate demand and therefore,
investment volatility analysis can help explain the short-run income fluctuations. It is also
the central link through which monetary policy (rate of interest) affects the economy.
Jorgenson's neoclassical theory argues that investment takes place when its marginal
benefit equals marginal cost. In the Jorgenson's model, both the growth rate of output and the
user cost of capital (UCK) play important roles. However, their relative importance depends on
the elasticity of substitution between labor and capital. If we assume a Cobb-Douglas
production function, where elasticity of substitution between labor and capital is unity, both the
factors receive equal weights in investment equations. However, if a fixed coefficient production
function is used, where elasticity of substitution between labor and capital is zero, the cost of capital
has no effect on investment (Rao, 1980; and Baddeley, 2003). Alternatively, the Keynesian
approach has mainly emphasized the role of growth of output in investment equations. A modification
of the Keynesian approach is the accelerator theory of investment in which investment is
regarded as the process of adjusting the current capital stock to a desired
level. |
