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Rates of Return, Investment Behaviour and Monetary Policy
Credit and Capital Markets – Kredit und Kapital, Vol. 16 (1983), Iss. 1 : pp. 16–35
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Jüttner, D. Johannes
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Abstract
Rates of Return, Investment Behaviour and Monetary Policy
This paper examines the role of Tobin’s supply-price-of-capital model for investment decisions, the problems associated with its empirical implementation and its usefulness for monetary policy purposes. The notion that lenders (financial investors) and borrowers (entrepreneurs) in the capital market compare the rate of return required by the market with the marginal efficiency of capital of new investment projects, is predicated on the view that they have access to the same set of informations pertaining to these investments in real capital. It appears that this assumption does not correctly reflect economic reality. Consequently the investment criterion can no longer be epitomized in a single variable such as Tobin’s q. The attempts to empirically implement the supply price of capital or some of its components are critically appraised. The majority of the investigations fails to distinguish between the average and the marginal supply price of capital and none provides empirical observations for the latter rate of return. An examination of the link between this required rate of return and monetary policy actions reveal grave defects in this relationship. When discretionary monetary policy actions influence current output prices and inflationary expectations along with share market prices, the supply price of capital degenerates into an immovable policy indicator.