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In this paper we provide evidence of a stylized fact: changes in the rate of growth of autonomous demand tend to be followed by (Granger-cause) changes of the same sign in the share of business investment in GDP, even after controlling for the real interest rate and the profit share. By means of an Instrumental Variables approach, we show that this finding is not spurious but reflects a causal effect of autonomous demand on the investment share.

We then investigate the compatibility of this result with alternative macroeconomic frameworks: we find it to be inconsistent with the canonical New Keynesian 3-equations model; with the Neo-Kaleckian model with a flexible equilibrium degree of capacity utilization and with the Classical growth model (Duménil and Lévy, 1999). On the other hand, the positive influence of autonomous demand on the investment share is compatible with autonomous demand-led growth models in which capacity adjusts to demand in the long-run.

 

Demand-Led Growth Theory, Hysteresis, Capacity Adjustment, Investment