Estimates from regression analysis by BIS show that the sensitivity of investment to investment opportunities (proxied by Tobin’s Q) is approximately three times more sensitive for physical investment than for intangible investment – a result that the BIS suggest could be explained by “the structural lumpiness of intangible investment”. In a similar vein, Ryan and Taylor (2017) also find that intangible capital responds more slowly to changes in investment opportunities. They conclude that, compared with physical capital, intangible capital’s convex adjustment costs are roughly twice as large. 9 See https://www.oecd.org/eco/growth/OECD-2015-The-future-of-productivity-book.pdf. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  Although these secular forces may likely persist, many of the conditions for a revival in business investment are now in place. II. The Contribution of Central Banks to Investment Recognising that the most important contributions will be from structural policies, how can central banks support that belated investment recovery? First, we must acknowledge that, while the cost and availability of finance matters; internal cash flows, the profit outlook and uncertainty are far more important determinants of investment. Monetary policy affects companies’ profits and cash flows through its effects on domestic demand and, via the exchange rate, external demand. Given the importance of internal finance for investment, and the high hurdle rates investment projects must clear, such indirect effects are more important for investment than the direct effects on the cost of capital. The biggest contributions of central banks are therefore improving the demand and profit outlooks and reducing uncertainty.
6  All speeches are available online at www.bankofengland.co.uk/speeches  6  Chart 1: G4 non-residential investment weak since the crisis Percentage changes since 2007 15 United Kingdom  United States  Euro area  Japan  10 5 0 -5 -10 -15  2007  2008  2009  2010  2011  2012  2013  2014  2015  -20 2016  Sources: Eurostat, ONS, OECD and Bank of England calculations. Notes: The data for the UK, the US and Japan are for private non-residential investment; the data for the euro area include public nonresidential investment. Chart 2: Weakest UK business investment in half a century Indices, peak in GDP = 100 160 Range of previous recessions  150 140  2008 Average of previous recessions  130 120 110 100 90 80 70 60  -20  -16  -12  -8  -4 0 4 8 12 16 20 24 Quarters relative to date when GDP peaked  28  32  36  Sources: ONS and Bank calculations. Notes: The chart plots real business investment. The range includes the recessions of 1973, 1979 and 1990. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Chart 3: UK real business investment to GDP ratio is falling Percent of GDP 12 10 8 6 4 2  1997  1999  2001  2003  2005  2007  2009  2011  2013  2015  0 2017  Source: ONS.