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BPEA Article

An Alternative Model of Business Investment Spending


DESPITE A VAST LITERATURE ON THE DETERMINANTS of investment behavior, questions about the way in which relative prices and output influence investment expenditures have not been satisfactorily resolved. In the "neoclassical" investment models, relative prices and output are commonly introduced as a composite variable, a procedure that does not allow for the possibility of separate and distinct effects of these two determinants on the level of investment expenditures. Yet separation of these effects is critical for designing effective monetary and fiscal policies to stabilize and stimulate the growth of the economy.

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