Investment: Driving the Business Cycle

It is supposed, particularly by supply-side economists, that investment drives the business cycle.  While I suggest fixating on any one component will lead to a myopic and sometimes misguided conclusion, it is very difficult to deny that employment is created through capital formation.

We have an interesting graph which makes the link between unemployment & capital formation clear.  We have created a ratio:  Capital Consumption as a fraction of Gross Private Domestic Investment.  This measures how much of investment is new — higher values indicate that more of the investment is going toward replacement rather than expanding capacity.


Apart from the very clear relationship, the ratio also seems to have a strong leading relationship — the unemployment rate converges on it.

It appears to suggest that the unemployment rate may drop in response to a push for new, non-replacement investment.

At the same time, investment in general seems to be lead by Total Investments at Commercial Banks:


The question is:  what will lead to a greater appetite to invest?

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One Response to Investment: Driving the Business Cycle

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