The lead-lag relationships between profits, investment and output: The evidence from Germany

This study considers the short-term lead-lag relationships between profits, private investment, and output. The interplay between the variables is examined using quarterly data for Germany during the 1991Q2–2020Q3 period. The methodology comprises: examination of the cross-correlations; the estimation of linear regression models with finite and polynomial distributed lags, as well as vector autoregressions; and the time-varying and frequency domain Granger causality tests to account for instabilities in the series and to distinguish causality at different time horizons. The findings provide strong support for the “profit as a driver of investment” and “investment as a driver of output” hypotheses, and ambiguous support for the opposite hypothesis (“investment that leads profit”). This paper is one of the few to examine profit-investment-output relationships in a setting other than the United States and to employ complementary and nondescriptive methods to obtain more robust findings.