I. Reduced investment profitability

 

Figure 3.7 also presents the evolution of real corporate profit growth (panel 2) and of corporate profit rates (panel 3). It shows that although no negative shifts in investment profitability are observable up to the early to mid-2000s, investment profitability has markedly declined in the aftermath of the global financial crisis, particularly in the euro area, Japan, and the United Kingdom. Therefore, the hypothesis that a decline in investment profitability in advanced economies has contributed to the decline in real rates does not find empirical support up to the crisis, after which it becomes a key factor.

 

Another way to examine the evolution of the attractiveness of investment is to look at the dynamic of Tobin’s q (Hayashi, 1982). A q value greater than one for a company means that the market value of the company is greater than the value of its recorded assets and that firms have an incentive to invest in it. Likewise, a decline in the value of q implies that investment becomes less attractive. Using Thomson Reuters Worldscope data for a sample of more than 30,000 firms for 74 countries for 1990–2013 (Brooks and Ueda, 2011), the analysis finds that the dynamic of q seems to follow the evolution of investment profitability presented above (Figure 3.7, panel 4).22 In particular, no negative shifts in the attractiveness of investment are observable in the 1990s and early to mid-2000s, but q slumped in the aftermath of the global financial crisis.

 

In summary, both of these factors contributed to the decline in advanced economy investment ratios, but during different periods: (1) from 1980 to early in the first decade of the 2000s, the substantial decline in the relative price of investment was important, and (2) in the aftermath of the global financial crisis, the negative shift in investment profitability was important.

 

Reference:

Blanchard O J, Summers L H, Blinder A S, et al. Perspectives on high world real interest rates[J]. Brookings Papers on Economic Activity, 1984: 273-334.