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Irreversible Investments And Volatile Markets: A Study Of The Chemical Processing Industry

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Gregory K. Bell
José M. Campa

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Abstract

This paper investigates the empirical effect of volatility on irreversible investments. We use a sample of chemical products in the United States and the European Union to test the impact of volatility on new investments in capacity. We distinguish among three sources of volatility: exchange rates, input prices, and product demand. We find that the effects of volatility on the amount of capacity investment differ depending on the source of volatility. Input prices and product demand volatility do not appear to have a material and statistically significant effect in either the United States or the European Union. In contrast, exchange rate volatility has a significant negative impact on investment by chemical manufacturers in the European Union. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 79 (1997)
Issue (Month): 1 (February)
Pages: 79-87
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Handle: RePEc:tpr:restat:v:79:y:1997:i:1:p:79-87

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  1. Laarni Bulan & Christopher J. Mayer & C. Tsuriel Somerville, 2006. "Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development," NBER Working Papers 12486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Richard H. Mattoon, 2005. "Energy markets and the Midwest economy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 19-31. [Downloadable!]
  3. Serven, Luis, 1998. "Macroeconomic uncertainty and private investment in developing countries - an empirical investigation," Policy Research Working Paper Series 2035, The World Bank. [Downloadable!]
  4. 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. [Downloadable!]
    Other versions:
  5. Hisham Foad, 2005. "Currency Unions, Options, and Foreign Direct Investment," Emory Economics 0516, Department of Economics, Emory University (Atlanta). [Downloadable!]
  6. Demir, Firat, 2008. "Financial Liberalization, Private Investment and Portfolio Choice: Financialization of Real Sectors in Emerging Markets," MPRA Paper 3835, University Library of Munich, Germany, revised 01 Apr 2008. [Downloadable!]
    Other versions:
  7. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "The Impact of Uncertainty on Investment: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-060/3, Tinbergen Institute. [Downloadable!]
  8. Timothy Dunne & Xiaoyi Mu, 2008. "Investment spikes and uncertainty in the petroleum refining industry," Working Paper 0805, Federal Reserve Bank of Cleveland. [Downloadable!]
  9. Yongil Jeon & Taekwon Kim & Stephen M. Miller, 2004. "The Value of Waiting: Foreign Direct Investment with Uncertainty and Imperfect Local Knowledge," Working papers 2004-44, University of Connecticut, Department of Economics. [Downloadable!]
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