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The role of relative price volatility in the efficiency of investment allocation

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  • Cavallo, Eduardo
  • Galindo, Arturo
  • Izquierdo, Alejandro
  • León, John Jairo

Abstract

This paper estimates the impact of relative price volatility on sector-level investment allocation using a panel of 65 countries with data for 26 manufacturing industries over the period 1985–2003. Results indicate that volatility distorts efficient investment allocation in that investment is not necessarily devoted to relatively more productive sectors, especially in emerging market economies that are highly exposed and may lack the necessary institutions to deal with it successfully. This is evidence in support of theories suggesting that relative price volatility provides incentives for entrepreneurs to adopt more “malleable” but less productive production technologies, enabling them to accommodate more easily abrupt and frequent changes in relative prices, but at the cost of using less productive technologies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 33 (2013)
Issue (Month): C ()
Pages: 1-18

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Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:1-18

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Sector-level TFP; Relative price volatility; Investment allocation; Financial crises; Emerging markets; Malleable technologies;

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References

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Cited by:
  1. Wang, Yizhong & Chen, Carl R. & Huang, Ying Sophie, 2014. "Economic policy uncertainty and corporate investment: Evidence from China," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 26(C), pages 227-243.
  2. Maria Franco & Carlos Scartascini & Mariano Tommasi, 2014. "State Capacity and the Quality of Policies: Revisiting the Relationship between Openness and the Size of Government," IDB Publications 86254, Inter-American Development Bank.

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