Government investment and the stock market

Frederico Belo, Jianfeng Yu

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

Abstract

High rates of government investment in public sector capital forecast high risk premiums both at the aggregate and firm-level. This result is in sharp contrast with the well-documented negative relationship between the private sector investment rate and risk premiums. To explain the empirical findings, we extend the neoclassical q-theory model of investment and specify public sector capital as an additional input in the firm's technology. We show that the model can quantitatively replicate the empirical facts with reasonable parameter values if public sector capital increases the marginal productivity of private inputs.

Original languageEnglish (US)
Pages (from-to)325-339
Number of pages15
JournalJournal of Monetary Economics
Volume60
Issue number3
DOIs
StatePublished - Apr 1 2013

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