Investment Puzzle: Deeper Roots

Abstract

This paper investigates empirically the roots of the investment puzzle from the global megatrend perspective. The empirical model of this study augmented the uncertainty-finance accelerator investment model with megatrend variables of a transition to service industry, aging population and a rise in income inequality. The main estimation results show that they have affected negatively the business investment over the period 1980-2014. The shift to service driven investment fall is the price dominant effect during the transition, which is not necessarily pessimistic news, while the suppressing effects from aging and a rise in income inequality require adequate policy reactions. In addition, the analysis finds significant negative spillover effects of trade partners' aging and income inequality on a country's own private investment. Based on the empirical results, the G20's efforts in inclusiveness with structural reforms are expected to stimulate global business investment.