Investment parameters (adapt and forei)

Table of contents

For each sector, investment behaviour is governed by the representative firm in that sector. The forward-looking component of its investment decisions is captured by the sector- and region-specific Tobin’s Q variable TOB(sec_std, regions). This applies to all sectors, including the sectors responsible for producing raw capital and household capital.

A share, adapt, of investment in each sector responds directly to TOB, reflecting forward-looking behaviour. The remaining share of investment adjusts more gradually. This slower-adjusting component bases its decisions on TPA(sec_std, regions), a smoothed version of TOB that evolves more slowly but converges to it in the long run. This can be interpreted as the backward-looking or adjustment-constrained portion of investment.

The relative weights on forward-looking (TOB) and backward-looking (TPA) investment behaviour are determined by the parameter forei.

Adjustment of TPA toward TOB is governed by the regional adapt parameter. This parameter controls the speed at which TPA closes the gap with TOB and is currently assumed to be the same across all sectors, including capital-producing sectors. The default value of adapt is 0.35, meaning that 35% of the gap between TPA and TOB is eliminated each year.