Financialization and the US Economy

Financialization and the US Economy

New Directions in Modern Economics series

Özgür Orhangazi

Özgür Orhangazi brings together a comprehensive analysis of financialization in the US economy that encompasses the historical, theoretical, and empirical sides of the issues. He explores the origins and consequences of the dramatic rise of financial markets in the US economy and focuses on the impacts of this process of ‘financialization’ on the operations of the non-financial corporate sector.

Chapter 6: Financialization and Investment: Aggregate Analysis

Özgür Orhangazi

Subjects: economics and finance, financial economics and regulation, political economy, politics and public policy, political economy

Extract

Financialization can have two potential negative impacts on capital accumulation, as discussed in the previous chapter. First, increased financial investment and financial profit opportunities can crowd out real investment by creating managerial short-termism and directing funds away from real investment. Second, increased financial payments can decrease real investment by decreasing the quantity of available funds for real investment, shortening the planning horizons of firm management and increasing uncertainty. These two potential negative effects are taken into account in the investment model described above. In this chapter, I econometrically test the effects of financial profits and financial payments of NFCs on their real investment, using aggregate time-series data for US NFCs. I find that the role played by these two variables is empirically supported by the econometric analysis, although statistical significance of the parameters is low in some cases. Nevertheless, the results provide initial support for a negative relationship between financialization and real investment. This chapter is organized as follows. In the next section, I present the statistical specification to be tested and discuss the properties of the data. I turn to econometric issues in the second section and present regression results in the third one. Finally, the last section provides an evaluation of the results and lays the ground for the firm-level analysis to follow in the next chapter. STATISTICAL SPECIFICATION AND DATA The discussion of the determinants of investment in fixed assets in Chapter 5 considered traditional variables such as rate of pro...

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