Testing the neoclassical long-run and the Keynesian short-run effects of investment on output and growth in India

This study examines the neoclassical long-run and the Keynesian short-run effects of investment on output and tests the null of noncausality between investment and growth in India. The long-run model is estimated using the single-equation and maximum-likelihood system estimators. All of the estimators suggest the cointegrating relationship between investment and output, and the results are robust to the choice of estimator. The conventional and new cumulative sum (CUSUM) tests show the long-run stability of equilibrium residuals and reinforce the cointegrating relationship. The error-correction model suggests bidirectional Granger causality between investment and growth. The investment constitutes around one fourth of the total weight in aggregate demand and, as corollary of such major weight and the significant effects, it remains a potential source of short-run economic fluctuations. A sustained acceleration of investment is essentially crucial for the acceleration and sustainability of economic growth.