Monday, April 20, 2015

The IMF Explains The Global Decline In Business Investment

This IMF study looks at the many of the factors that have contributed to the decline in global business investment.  The study is important because business investment is the most volatile component of GDP.  It also interacts with other factors such as the level of employment and wages which affects consumption which is the largest component of GDP.  Moreover, there are a number of competing explanations for the decline in business investment.  For example, the finance minister of Germany believes that businesses cut back on investment when the lack confidence in government policies.  The conclusions reached by the IMF were not equivocal.  It concluded that the decline in global investment is almost entirely explained by the decline in global activity.  Businesses have cut back on investment in response to a fall in demand.  In some countries the lack of credit has also been a contributing factor but that to is related to the decline in output.  Banks are less willing to make loans and firms are less willing to borrow at low levels of output.

The IMF study also contradicts the idea that government borrowing "crowds out" business borrowing and investment.  The assumption is that government borrowing shrinks the pool of savings available for lending.  That raises the interest rate which decreases the demand for business investment.  Business investment has not been crowded out by high interest rates.

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