Investment Spending in Australia: Further Study and Interpretation*

Recent work in macro theory suggests that aggregate ‘demand’ policies have direct supply‐side effects in the short run, if Lucas's standard specification of the nonlinear adjustment costs for capital is generalized In this paper, we estimate an investment equation (involving Tobin's valuation ratio and Australian data) which nests three hypotheses: Lucas's standard specification of adjustment costs, a simple generalization which permits labour to be involved in the installation of capital and a model which allows for liquidity constraints. The results support the suggested alternative formulation of the q‐theory