Real Rates of Return and Aggregate Investment

• Published in: Southern economic journal Vol. 51; no. 1; pp. 157 - 165
• Main Authors: Hosek, William R., Zahn, Frank
• Format: Journal Article
• Language: English
• Published: Chapel Hill, N.C., etc Southern Economic Association and the University of North Carolina at Chapel Hill 01-07-1984; Southern Economic Association and the University of North Carolina; Southern Economic Association
• Subjects: Aggregate; Capital goods; Capital investments; Capital stocks; Corporate taxes; Economic theory; Interest rates; Investment; Investment return rates; Investment tax credits; Portfolio management; Property taxes; Rates of return; Return on capital; Return on investment; Theory; Wealth
• ISSN: 0038-4038; 2325-8012
• DOI: 10.2307/1058329

The investment decision can be split into 2 related parts: How much additional capital to use is a production decision; how much additional capital to hold is an asset portfolio decision. By taking noninterest costs in the service price as given along with the derived marginal product of capital, the implied real rate of return on capital in the view of the production managers can be determined. The 2 current approaches to examinations of investment demand distinguish capital goods as an asset to the household sector and services of capital as an input to the company. Independent estimates of the real rate of interest and the real rate of return on capital are used to estimate a derived demand for investment based on assumptions of imperfect substitution and perfect rental markets. The framework for analysis is an asset portfolio adjustment model. Results suggest that economic policy intended to stimulate investment must be aimed at the more sensitive components of the real rate of return on capital.