The macro determinants of firms' and households' investment: Evidence from Italy

Using under-exploited institutional sector account data, we assess the main drivers of both firms' and households' investment in Italy over the past two decades. We thus test the validity of the flexible neoclassical model of investment for both sectors, in particular by exploring the significance of additional drivers to output and to the real user cost of capital and by assessing both feedback effects and short- and long-run linkages across all variables in a vector error correction framework. Our findings support the neoclassical model in the long run. However, in the short run, both firms' and households' capital accumulation is found to have been dampened by a rise in uncertainty, a deterioration in confidence, as well as by higher indebtedness and by tighter financing constraints. Moreover, we find that disregarding the role of these short-run variables hinders the understanding of investment dynamics in Italy, especially in the most recent recessionary years.