We estimate the effect of demand and price uncertainty on firms’ investment decisions from a panel of manufacturing firms. Uncertainty measures are derived from firms’ subjective qualitative expectations. They are close to their theoretical counterparts, the variances of future demand and price shocks. We find that demand uncertainty depresses planned and realized investment, while price uncertainty is insignificant. This is consistent with the behavior of monopolistic firms with irreversible capital Caballero, 1991). Further, firms revise their investment plans very little. They may do so in response to new information on sales growth, but not as a result of reduced uncertainty.
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Paper provided by European Central Bank in its series Working Paper Series with number
347.
Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
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Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003.
"Inflation, relative prices and nominal rigidities,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105
Bank for International Settlements.
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