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Tobin’s q, the Demand for Investment and the Corporate Profit Taxation Policy in Canada (1950-1983)

Published online by Cambridge University Press:  17 August 2016

Hassouna Moussa
Hassouna Moussa*
Affiliation:
Acadia University, Wolfville
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INTRODUCTION

In his General Theory, Keynes argued that the ratio q of the market value of firms to the replacement costs of their assets is an important determinant of investment demand. As the market value of the firm depends on the yield of stocks and bonds, the ratio q depends itself negatively on the general level of interest. It also depends positively on the corporate income tax parameters such as the tax rate and the capital cost allowance schedule. That is, in this model, both monetary policy and corporation taxation policy affect the level of investment, if at all, through q. Whether monetary policy, or corporate income taxation policy can stabilize investment depends on at least two conditions. First they must alter the procyclical tendency of q due to the procyclicity of expected profits, and secondly, q must act on investment with a very short lag.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 53 , Issue 1 , March 1987 , pp. 27 - 50
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1987 

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Footnotes

(1)

The author wishes to thank the referees for their useful and incisive comments.

References

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