In September 1931, Sweden became the first country to make the stabilization of the domestic price level the official goal of its monetary policy, actually the only country that so far has adopted such an explicit price level target. Starting from the issues and concepts familiar from research and policy experience of inflation targeting -as contrasted to price level targeting -this paper examines the evolution of the Swedish price level targeting in the 1930s. We bring out a number of similarities and differences between price stabilization in the 1930s and in the 1990s.

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This paper uses a neoclassical investment model extended with installation costs for capital, agency costs for investment financing, and the possibility of the firm being output constrained as a framework for an empirical analysis of investment behaviour in the Swedish manufacturing industry. The theory is implemented within a multivariate error-correction approach on data covering the time period 1951 to 1995, and we gain the following main results: (1) Tobin’s average Q is not the sole determinant of investment, neither in the short nor in the long run, and other variables like real output and capital gearing also affect investment activity; (2) the out-of-sample forecasts of the model track the evolution of actual investment growth quite impressively, especially at short- and medium-term horizons (1–2 years); (3) a relative equity-price variable is shown to constitute a good approximation of average Q, both for empirical modelling in general and forecasting in particular. Copyright Springer-Verlag 2004Forecasting investment, multivariate error-correction model, neoclassical investment theory, Tobin’s Q ,

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