The second half of the 1980s witnessed a major and widespread recovery in business investment expenditures in the OECD countries. Real gross fixed investment by the business sector grew by only 3.8 per cent per year from 1970 to 1979 and stagnated during the recessionary period of 1980 to 1983. In the five years 1984 to 1988 it then grew by almost 7 per cent a year. Nevertheless, the increase in the stock of productive capital - gross investment less scrapped capital - as a proportion of output tailed off in the 1980s in most OECD countries.
These events raise several related questions: what accounts for the recent strength in investment? Can it be expected to continue? Is the deceleration of capital-output ratios a cause for concern? If so, should governments attempt to raise investment? This paper attempts to provide answers, sometimes tentative, to some of these questions. The neo-classical model of investment is used as a framework of analysis, and emphasis is placed on the supply-side aspects of capital formation rather than its business-cycle, or demand-side aspects. The focus is therefore on aggregate business-sector fixed investment, as the bulk of productive capital in OECD economies is in the business sector, and other categories of investment - residential construction, stockbuilding and public sector investment - are not driven by the same economic factors.
This year, 2006, represents a major milestone for the 78 million baby boomers in the U.S. as the first wave of “boomers” turns age 60. Two years from now—in 2008—these individuals will qualify for Social Security’s early retirement benefits and three years after that—in 2011—this initial wave will attain age 65 and become eligible for Medicare. This initial cohort will be followed, annually, by 18 additional waves of baby boomers reaching similar milestones, with the last of the individuals born in the 1946-1964 period reaching age 60 in 2024.
Baby boomers and succeeding generations face a somewhat daunting task in planning for their financial future especially as it relates to retirement. Many of these individuals will face retirement with no guaranteed monthly income, or with a substantially reduced amount, coming from their employers due to multiple job changes or as the result of an employer’s decision to terminate or “freeze” an existing defined benefit pension plan. Further, while benefiting from an increased life expectancy, many of these same individuals also will likely be confronted with high medical costs and long-term care costs at a time when many employers are implementing major cutbacks in their retiree medical expense plans and Medicare is experiencing significant financial pressures of its own. Given these trends, together with the projected future deficits under Social Security, it is clear that baby boomers and successive generations need to exercise greater individual responsibility in seeing that their retirement income objectives are achieved.
Bonds of various maturities all trade simultaneously in a well-organized market that appears to preclude opportunities for financial arbitrage. Indeed, the assumption of no arbitrage is central to an enormous literature that is devoted to the empirical analysis of bond pricing and the yield curve. This research has found that almost all movements in the yield curve can be captured in a no-arbitrage framework in which yields are linear functions of a few unobservable or latent factors (e.g., Duffieand Kan 1996, Litterman and Scheinkman 1991, and Dai and Singleton 2000).
