Aqib Aslam, Samya Beidas-Strom, Daniel Leigh (lead), Seok Gil

Private Investment: What’s the Holdup?
Aqib Aslam, Samya Beidas-Strom, Daniel Leigh (lead), Seok Gil Park, and Hui Tong. Support from Gavin Asdorian,
Joshua Bosshardt, Angela Espiritu, Hao Jiang, Yun Liu, and Hong Yang. Consultant: Sebnem Kalemli-Ozcan. 1
Motivation
• Debate over why businesses are not investing more.
– Is low investment mainly symptom of weak economic
environment? (E.g., Chinn, 2011; Krugman, 2011.)
– Are special impediments to blame, such as policy uncertainty or
financial sector weaknesses? (E.g., European Investment Bank,
2013; Buti and Mohl 2014.)
• Diagnosing the cause is critical for devising policies.
Central questions of the chapter
1. Is there a global slump in private investment?
2. Is the slump in private investment due to housing or is it broader?
3. How much of this slump reflects the weakness of demand?
4. Which businesses have cut back more on investment and why?
3
1. Is there a global slump in private investment? Mainly AEs
Real Private Fixed Investment
(Log index; 1990 = 0)
2.5
1. World
2. Advanced Economies
2.5 2.5
3. EMDEs
4. EMDEs excl. China
2.5
2.0
2.0 2.0
2.0
1.5
1.5 1.5
1.5
1.0
1.0 1.0
1.0
0.5
0.5 0.5
0.5
0.0
0.0 0.0
0.0
1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014
Sources: Consensus Economics; IMF, Fiscal Monitor database; and IMF staff estimates.
1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014
4
Closer to home, investment has held up relatively well.
Real Private Fixed Investment
(Log index; 1990 = 0)
2.0
South Africa
2.0
EM18
1.0
EM
Commodity
Exporters
BRICS excl.
South Africa
2.0
4.0
SADC excl. South
Africa
3.5
1.5
1.5
1.5
3.0
0.5
1.0
1.0
1.0
2.0
0.0
0.5
0.5
0.5
2.5
1.5
1.0
-0.5
0.0
0.0
0.5
-0.5
0.0
-1.0
-0.5
0.0
Sources: Consensus Economics; IMF, Fiscal Monitor database; and IMF staff estimates.
Note: EM18: Argentina, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Romania,
Russia, Thailand, Turkey, and Ukraine; EM commodity exporters: Brazil, Chile, Colombia, Russia, and Peru.
5
2. AEs: Just housing? Broader.
Categories of Real Fixed Investment
Decomposition of the Investment Slump, 2008–14
(Log index; 1990 = 0)
(Average percent deviation from spring 2007 forecasts)
5
1.4
1. Residential
2. Business
1.4
0
1.2
1.2
1.0
1.0
0.8
0.8
-15
0.6
0.6
-20
-5
-10
Business
0.4
0.4
-25
0.2
0.2
-30
0.0
0.0
-0.2
-0.2
1990 1994 1998 2002 2006 2010 2014 1990 1994 1998 2002 2006 2010 2014
Residential
Total
-35
Advanced United
economies States
United
Kingdom
Japan
Selected Other euro
euro area
area
1/
1/ Euro area economies (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
Other
6
3. How much of the slump in business investment reflects
output?
A. Has the comovement of investment and output been unusual?
– Is this time different from historical recessions?
B. To what extent has weak economic activity caused the weakness in
investment?
– Address reverse causality issues using instrumental variables.
7
A. Has the comovement of investment and output been
unusual?
Responses of Business I and Y to Various Shocks
(Percent deviation from forecasts in year of recession)
Historical recessions
1. Business Investment
Ratio of Responses
(Average Business investment to output)
GFC Advanced Economies
GFC crisis AEs
GFC Noncrisis AEs
2. Output
5
3.5
5
3
0
0
-5
-5
-10
2.5
2
1.5
-10
1
-15
-15
0.5
-20
-20
0
-25
-25
–1 0
1
2
3
4
5
6
–1 0
1
2
3
4
5
6
Historical
recessions
GFC AEs
GFC crisis AEs GFC noncrisis
AEs
8
B. Causality: Is investment weak because the economy is
weak?
Investment-Output Relationship: Instrumental Variables Estimation
Note: * p < .10; ** p < .05; *** p < .01.
9
Little of the observed decline in investment remains unexplained
once we consider the expected effects of the output decline.
Real Business Investment: Actual and Predicted Based on Economic Activity
(Percent deviation of investment from spring 2007 forecasts)
Actual
1. Advanced Economies
2. GFC Crisis AEs
Predicted
3. GFC Noncrisis AEs
10
10
10
0
0
0
-10
-10
-10
-20
-20
-20
-30
-30
-30
-40
-40
-40
-50
-50
-50
2007 2008 2009 2010 2011 2012 2013 2014
2007 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014
10
At the country level, actual investment close to prediction.
Accelerator Model: Real Business Investment
(Log index)
It
Yt i

12
12

 i 1  i
 i 1  i xt i     t
K t 1 K t 1
K t 1
Actual
6.5
1. United States
Spring 2007 forecasts
2. Japan
10.0
6.3
3. Germany
Predicted
4.6
4.5
9.8
6.1
4. France
4.8
4.6
4.4
4.4
5.9
9.6
4.3
4.2
5.7
4.2
9.4
5.5
4.1
5.3
9.2
1990 1994 1998 2002 2006 2010 2014: 1990 1994 1998 2002 2006 2010 2014:
Q3
Q3
4.0
4.0
3.8
1990 1994 1998 2002 2006 2010 2014: 1990 1994 1998 2002 2006 2010 2014:
Q3
Q3
11
Some euro area economies:
Weaker-than-predicted investment.
Accelerator Model: Real Business Investment
(Log index)
Actual
Spring 2007 forecasts
4.0
Predicted
1. Selected Euro Area Economies1
3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
1/ Euro area countries (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
12
Role of financial constraints (survey-based)?
Accelerator Model: Real Business Investment
(Log index)
Actual
Spring 2007 forecasts
4.0
Predicted
Adding financial constraints
1. Selected Euro Area Economies1
3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
1/ Euro area countries (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
13
Role of policy uncertainty (news-based)?
Accelerator Model: Real Business Investment
(Log index)
Actual
Spring 2007 forecasts
4.0
Predicted
Adding uncertainty
1. Selected Euro Area Economies1
3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
2007 2008 2009 2010 2011 2012 2013 2014:
Q3
1/ Euro area countries (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010-11 sovereign debt crisis.
14
Firm-level surveys cite weak demand as dominant factor
limiting production.
Insufficient Demand
100 1. Europe
100 2. Stressed Euro Area
100 3. United States
80
80
80
60
60
60
40
40
40
20
20
20
0
0
2000
2004
2008
2012
2000
2004
2008
2012
0
2000
2004
2008
2012
2008
2012
Financial Constraints
100 1. Europe
100 2. Stressed Euro Area
100 3. United States
80
80
80
60
60
60
40
40
40
20
20
20
0
0
2000
2004
2008
2012
2000
2004
2008
2012
0
2000
2004
15
4. Which businesses have cut back more on investment
and why?
• From macro … to micro (firm-level). Why?
• Shed light on channels at work (beyond economy-wide
developments).
• Larger number of observations. Control for more factors.
• Focus on role of financial constraints and uncertainty.
16
Estimating the role of financial constraints.
•
Estimate effect on I/K ratio for firm i in sector j in country k in year t.
•
“Difference-in-difference” approach of Dell’Ariccia, Detragiache, and Rajan
(2008), applied to investment as in Claessens, Tong and Wei (2012).
I ijk ,t
K ijk ,t 1
  Financial Dependence j  Crisis k ,t    l xijk ,t   i   k ,t d k ,t   j ,t d j ,t   ijk ,t
l
k ,t
j ,t
•
Intuition: If financial constraints play a significant role, then firms in sectors that
are more dependent on external finance should cut I more during a credit
crunch.
•
Data: Thomson Reuters Worldscope; Sample: 28 AEs; 27,661 firms; 2000-13.
17
How do we measure financial dependence?
•
Financial dependence at sector level (Rajan and Zingales, 1998). Fixed over time.
Capital Expenditures  Cash Flow
Financial Dependence 
Capital Expenditures
•
Index. Based on US firms. Apply to 3-digit sector level for all AEs. (Assumption.)
•
Interact with country-level credit crunch: Banking crisis (Laeven-Valencia).
18
Evidence: Financial constraints
Note: *** p < .01.
•
Firms which are more financially-dependent invest less than less financiallydependent firms: 1.6 percentage points (=－0.02 × 0.8 × 100)
19
Review of Findings
• Slump in private investment: Mostly in AEs, broad-based.
(Not just housing.)
• Firms acting “normally” given weak economic environment.
Little unexplained weakness.
• Some exceptions: financial constraints, uncertainty.
20
Policies
 Comprehensive set of policies required.
•
•
Fiscal and monetary policies can encourage firms to invest.
More public infrastructure investment
– Could also spur demand in the short term, raise supply in the medium term, and
thus raise private investment in countries where conditions are right.
•
•
Structural reforms (e.g., strengthen labor force participation) could improve the
outlook for potential output and thus encourage private investment.
Policies aimed at relieving crisis-related financial constraints, including through
tackling debt overhang and cleaning up bank balance sheets.
21
World Economic Outlook
International Monetary Fund