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Investment Under Monetary Uncertainty: A Panel Data Investigation

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Author Info

  • Andrew Hallett
  • Gert Peersman
  • Laura Piscitelli

Abstract

There is a presumption in the literature that price or exchange rate uncertainty, or uncertainty in the monetary conditions underlying them, will have a negative effect on investment. Some argue that this negative effect will be extended by imperfect competition. However, models of “irreversible” investment show that the situation is more complicated than that. In these models, investment expenditures are affected by the scrapping price available on world markets and also by the opportunity cost of waiting rather than investing. The impact of uncertainty is therefore going to depend on the type of industry and hence on the industrial structure of the economy concerned. In addition, it may depend on the persistence of any price “misalignments” away from competitive equilibrium. In this paper, we put these theoretical predictions to the test. We estimate investment equations for 13 different industries using data for nine OECD countries over the period 1970–2000. We find that the impact of price uncertainty is negative or insignificant in all but one case whereas the impact of (nominal) exchange rate uncertainty is negative in only six cases, positive in four cases, and insignificant in three others. In addition, there are conflicting effects from the real exchange rate. The net effect depends on whether the source of the uncertainty is in domestic markets or in foreign markets. Copyright Kluwer Academic Publishers 2004

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File URL: http://hdl.handle.net/10.1007/s10663-004-1164-2
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Bibliographic Info

Article provided by Springer in its journal Empirica.

Volume (Year): 31 (2004)
Issue (Month): 2 (June)
Pages: 137-162

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Handle: RePEc:kap:ecopln:v:31:y:2004:i:2:p:137-162

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Web page: http://www.springerlink.com/link.asp?id=113294

Related research

Keywords: Investment expenditures; price and exchange rate uncertainty; PMGE estimators;

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References

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  1. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, Department of Economics, University of Kent.
  2. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  3. Philippe Bacchetta & Eric van Wincoop, 2001. "A Theory of the Currency Denomination of International Trade," Working Papers 01.07, Swiss National Bank, Study Center Gerzensee.
  4. Andrew Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Data Investigation," Economic Change and Restructuring, Springer, vol. 31(2), pages 137-162, June.
  5. Joseph P. Byrne & E. Philip Davis, 2005. "Investment and Uncertainty in the G7," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 141(1), pages 1-32, April.
  6. n/a, 1999. "An Artificial Neural Network System of Leading Indicators," NIESR Discussion Papers 198, National Institute of Economic and Social Research.
  7. Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Darby, Julia & Hughes Hallett, Andrew & Ireland, Jonathan & Piscitelli, Laura, 1998. "The Impact of Exchange Rate Uncertainty on the Level of Investment," CEPR Discussion Papers 1896, C.E.P.R. Discussion Papers.
  9. Julia Darby & Andrew Hughes Hallett & Jonathan Ireland & Laura Piscitelli, 2000. "Exchange Rate Uncertainty and Business Sector Investment," Econometric Society World Congress 2000 Contributed Papers 0600, Econometric Society.
  10. M Pesaran & Yongcheol Shin & Ron P Smith, 2004. "Pooled mean group estimation of dynamic heterogeneous panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
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Citations

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Cited by:
  1. Landon, Stuart & Smith, Constance, 2007. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," MPRA Paper 9958, University Library of Munich, Germany.
  2. Andrew Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Data Investigation," Economic Change and Restructuring, Springer, vol. 31(2), pages 137-162, June.
  3. Michael McMahon & Gabriel Sterne & Jamie Thompson, 2005. "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England.

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