Aggregate investment behaviour in New Zealand: An examination of the theory of investment behaviour and its econometric representation

Abstract

In this study an attempt is made to construct a model explaining quarterly investment in plant and machinery in the New Zealand economy, with a view to providing a basis for forecasting investment expenditures. A survey of theory and econometric models reveals that in the more successful overseas models the principle determinants of investment expenditures are changes in demand as reflected output changes, the capital stock, which gives an indication of existing capacity and determines replacement requirements, and also factors affecting the cost of capital equipment. These factors form the basis of the theory of investment behaviour. However it is found that the pure theoretical framework, although useful, does not provide a complete explanation of investment in New Zealand, and that such factors as import controls and other exogenous influences affect investment in this country. The final model purports to explain ninety three per cent of the variation in investment expenditures and is statistically sound. This was considered a good result in view of the data problems encountered. Although the model is not entirely satisfactory the equation performed reasonably well in ex-poste forecasts which suggests that with some improvements, particularly of some of the data series, it could provide a useful indication of the effects of policy measures on investment.