THE INVESTMENT-CASH FLOW LINKAGE REVISITED - EVIDENCE FROM AGGREGATE DATA AND MULTIVARIATE GRANGER-CAUSALITY TESTS

This paper reexamines the relationship between investment and cash flo w in the United States employing an empirical approach which addresses some of the methodological problems of many previous studies. A restr icted vector autoregressive model is specific for aggregate measures o f investment and cash flow in which the optimal lag lengths of these a s well as other variables are individually determined with the aid of Akaike's final prediction error (FPE) criterion. The model is then est imated using US. aggregate data (1957:I-1990:II) and the full informat ion maximum likelihood (FIML) technique. Finally, multivariate Granger -causality tests are performed based on the estimated equations. The r esults suggest that, at the macro level, investment and cash flow are causally independent variables. However, consistent with both the acce lerator and neoclassical investment models, output is found to exert ' 'causal'' influence on investment. The implications of these results f or the current recession are discussed.