Aggregate Demand and Demand Leakages in a Post-Keynesian Investment Function: A Dynamic Panel Data Analysis for Developed and Developing Countries

We investigate how multiple components of the profit rate differently impact the investment decisions of developed and developing countries in the medium and long run. First, we propose a modification of Bleckers' (2016) accelerator model, mainly by decomposing the profit variable and incorporating the New Developmentalism theory of access to demand. Second, we use the ICIO tables of OECD and other sources to create a database with 59 countries from 2000 to 2018 and test our hypothesis using the dynamic GMM methodology. Results suggest that demand growth — the accelerator component — is an important determinant of investment in all countries regardless of their development stage. However, while increasing access to demand in both the domestic and foreign markets has shown to be crucial for investment decisions of developing countries, raising the labor share has a pronounced importance on investment decisions in developed countries.