Mood, not r, drives investment

[Trond Andresen <trond.andresen@xxxxxxxxxxx>]

Under the subject: 'Re: What if and Why of Zero Taxation',
at 21:41 1/25/02 +0100, larson@xxxxxx wrote:

> ......
>
> I agree that investment should be high, but this has nothing to do with
> interest rates. There is no scientific study anywhere - and I've looked for a
> while now - that proves ANY kind of correlation between investments and
> interest rates. The I=I(r) is one of the most persistent macroeconomic
> myths in
> our world. The correct one is of course I=I(AD), with appropriate periodicity
> in denotations.
> .....

(Taking a break in my lurking... .)

Sven, I agree with your criticism of I = I(r).

But I = I(AD) should IMO be interchanged with

I = I (m)

where m is some measure of macroeconomic "mood" or "confidence", and is a
*dynamic* state (variable) with fairly large inertia, given by something
resembling (using continuous - not discrete - time representation):

dm/dt = (1/T) * ( -m + f( Y, r, ndx)  )

Verbally this says that mood changes slowly, influenced by output and
interest rate and some measure of the stock market index, *over time*. The
coefficient T indicates the time to turn mood around. Also Y and ndx is
inluenced by I, so there are feedback loops.
r is the sole (exogenous) control variable in this system.

Of course it is still more complicated and interconnected, so I stop
here.

My essential point is that you have to introduce a 'mood' variable (m) with
its own dynamics and interacting with other variables, even in a very simple
macroeconomic model. Investment is decided directly by m, and only
indirectly influenced by AD,Y, r and other variables.

Cheers,

Trond

--
Trond Andresen <trond.andresen@xxxxxxxxxxx>
http://www.itk.ntnu.no/ansatte/Andresen_Trond

The Norwegian University of Science and Technology
Department of Engineering Cybernetics
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