Simple and flexible accelerator theories are explained in this chapter. Accelerator theories describe fixed asset investment as the process of adjustment to a desired capital stock. Firms will want a larger capital stock if they expect demand for their products to rise. As investment is the flow into the capital stock, it will respond to changes in this expected demand for output. So accelerator models are built upon the insight that investment will be determined by output growth. Early ‘simple’ accelerator models were built upon the assumption that firms can adjust their capital stocks instantaneously and that expectations are static and lags are absent. Of course these assumptions are unrealistic and later formulations of flexible accelerator theory incorporated lag structures to capture delays in investment decision-making. The emphasis in accelerator theory on movements in quantity rather than price variables means that accelerator models are generally associated with a fixed-price, Keynesian approach.
KeywordsCapital Stock Output Growth Investment Expenditure Fixed Asset Investment Accelerator Model
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