A post-Keynesian theory for Tobin's q in a stock-flow consistent framework

By Engelbert Stockhammer, Felix Lopez Martinez

PKES Working Paper 1509

July 2015

The paper proposes a post-Keynesian framework to explain Tobin’s q behaviour in the long run. The theoretical basis is informed by the Cambridge corporate model originally proposed by Kaldor (1966), which is reinterpreted here as a theory for q. The core of the ‘Kaldorian q theory’ is a negative long-run relation between q and growth rates, a negative relation between q and propensities to consume, and the fact that q can be different from 1 in the long-run equilibrium. We generalise this model through a medium-scale Stock-Flow Consistent (SFC) model, which introduces important post-Keynesian aspects missing in the Kaldorian model, such as endogenous money, a financial system and inflation. We extend the model to include a more realistic treatment of firms’ financial structure decisions and allow the interdependence between these decisions and dividend policy. Numerical simulations confirm that the original Kaldorian relations between q and growth rates and propensities to consume hold, but unlike the original model, in our model q is not independent of how firms finance their investment. We also confirm the possibility of q being different from 1 in the long-run. Finally, we contrast this ‘post-Keynesian q theory’ with the Miller-Modigliani dividend irrelevance proposition and the neoclassical investment and financial theory. It is shown that its validity depends crucially on the value taken by q: for q values different from 1 the proposition will not hold and dividend policy will be relevant for equity valuation. Therefore, post-Keynesian q theory stands against the main predictions of mainstream finance and constitutes an alternative for developing a macroeconomic theory for equity markets.

Keywords: Tobin’s q, post-Keynesian macroeconomic theory, stock-flow consistent models, Cambridge corporate models, Miller-Modigliani dividend irrelevance proposition

JEL classification: E12 E22 E44 G10 O42