The macroeconomics of credit, asset prices and investment

My thesis investigates the impact of credit markets on asset prices and investment activity in the macroeconomy. The theoretical approach used in this thesis to analyse the relationship between credit markets and investment fluctuations is mainly based on the Tobin’s q (1969) model of investment. Following an initial benchmarking chapter which revisits the fundamental empirical facts relating to q and its relationship with investment activity, subsequent chapters build on the conventional Tobin’s q model of investment by integrating credit constraints. The nexus between credit and both private non-residential and private residential investment is investigated empirically in separate chapters. To measure the nature and degree to which investment is credit constrained, survey data on financial intermediaries’ willingness to lend is used as a measure to distinguish lenders’ attitudes towards credit standards. The empirical tests focus mainly on the U.S., but several OECD countries are considered where data is available. The empirical results show that changes in financial market conditions and incentives to lend in markets where information flows are asymmetrical can have significant impacts on asset prices, private investment activity and macroeconomic dynamics more broadly.