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Monetary Instability, the Predictability of Prices and the Allocation of Investment: An Empirical Investigation Using UK Panel Data

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Author Info

  • Paul Beaudry

    (University of British Columbia)

  • Mustafa Caglayan

    (University of Liverpool)

  • Fabio Schiantarelli

    ()
    (Boston College)

Abstract

It is often argued that monetary instability reduces the informational content of market signals and thereby hinders the efficient allocation of investment. In this paper we use a signal extraction framework to give empirical content to this idea. In particular, we show why this framework predicts that, as monetary uncertainty decreases, the cross-sectional distribution of investment widens. We then explore this hypothesis using panel data information for UK companies over twenty years. Our data generally support the view that monetary instability may affect investment allocation through its effect on the predictability of prices.

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File URL: http://fmwww.bc.edu/EC-P/wp312.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 312..

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Length: 36 pages
Date of creation: Feb 1996
Date of revision:
Publication status: Published, American Economic Review, 91, 648-662, 2001
Handle: RePEc:boc:bocoec:312

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Web page: http://fmwww.bc.edu/EC/
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Keywords: investment; price expectations; signal extraction;

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References

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  1. Ricardo J. Caballero, 1991. "A Fallacy of Composition," NBER Working Papers 3735, National Bureau of Economic Research, Inc.
  2. John Huizinga, 1993. "Inflation uncertainty, relative price uncertainty, and investment in U.S. manufacturing," Proceedings, Federal Reserve Bank of Cleveland, pages 521-557.
  3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  4. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  5. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Dynamic (S,s) Economies," NBER Working Papers 3734, National Bureau of Economic Research, Inc.
  6. Bean, Charles R & Symons, James, 1989. "Ten Years of Mrs. T," CEPR Discussion Papers 316, C.E.P.R. Discussion Papers.
    • Charles Bean & James Symons, 1989. "Ten Years of Mrs. T," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 13-72 National Bureau of Economic Research, Inc.
  7. Ball, Laurence & Romer, David, 2003. " Inflation and the Informativeness of Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 177-96, April.
  8. Mariano Tommasi, 1994. "Inflation and the Informativeness of Prices Microeconomic Evidence from High Inflation," UCLA Economics Working Papers 718, UCLA Department of Economics.
  9. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
  10. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  11. Willem H. Buiter & Marcus Miller, 1983. "Changing the Rules: Economic Consequences of the Thatcher Regime," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 305-380.
  12. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  13. Huizinga, John, 1993. "Inflation Uncertainty, Relative Price Uncertainty, and Investment in U.S. Manufacturing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 521-49, August.
  14. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  15. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  16. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  17. Laurence Ball & Stephen G. Cecchetti, 1990. "Inflation and Uncertainty at Long and Short Horizons," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 215-254.
  18. William H. Buiter & Marcus Miller, 1981. "The Thatcher Experiment: The First Two Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 315-380.
  19. Tommasi, Mariano, 1994. "The Consequences of Price Instability on Search Markets: Toward Understanding the Effects of Inflation," American Economic Review, American Economic Association, vol. 84(5), pages 1385-96, December.
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