Figure 15-7 Investment, the Capital Stock, and the Real Interest
Rate in Canada, 1965–2016
Long-Run Trends in the Capital Market
Part (i) of Figure 15-7 shows the annual flow of net non-residential
investment from 1965 to 2016. It is quite volatile over time, though
always positive. Part (ii) shows how this volatile flow of investment has
led to an ever-increasing non-residential capital stock; it grew at an
average annual rate of 2.6 percent over the period shown. Even in years
when the flow of investment is relatively large, the overall capital stock
rises only slightly, reflecting the small size of the investment flow relative
to the large accumulated capital stock. For similar reasons, large declines
in the flow of investment—like the one that occurred during the major
recession of 2009—led to only a slight slowdown in the growth of the
capital stock. Part (iii) of the figure shows the path of the real interest
rate, which is quite volatile and displays no clear trend over the half-
century. How can we use our model of the capital market to understand
these data?