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Firms’ investment decisions in response to demand and price uncertainty

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Author Info
Catherine Fuss () (National Bank of Belgium, bd. de Berlaimont 14, 1000 Bruxelles, Belgium.)
Philip Vermeulen () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany.)

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Abstract

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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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 347.

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Length: 35 pages
Date of creation: Apr 2004
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Handle: RePEc:ecb:ecbwps:20040347

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Related research
Keywords: investment; uncertainty; real options; survey data; panel data.;

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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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John Vickers, 2000. "Monetary union and economic growth," Research series 200005-6, National Bank of Belgium. [Downloadable!]
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    Other versions:
  3. Stephen J. Turnovsky, 2000. "Growth in an open economy: some recent developments," Research series 200005-1, National Bank of Belgium. [Downloadable!]
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    Other versions:
  5. Philippe Jeanfils, 2000. "A model with explicit expectations for Belgium," Research series 200003-3, National Bank of Belgium. [Downloadable!]
    Other versions:
  6. Paul Masson, 2000. "Fiscal policy and growth in the context of European integration," Research series 200005-3, National Bank of Belgium. [Downloadable!]
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  7. Patrick Bisciari, 2001. "Nouvelle économie," Documents series 200104, National Bank of Belgium. [Downloadable!]
    Other versions:
  8. Danny Cassimon & Peter-Jan Engelen & Hilde Meersman & Martine Van Wouwe, 2002. "Investment, uncertainty and irreversibility: evidence from belgian accounting data," Research series 200205-4, National Bank of Belgium. [Downloadable!]
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  13. Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August. [Downloadable!] (restricted)
  14. Michele Cincera, 2002. "Financing constraints, fixed capital and R&D investment decisions of belgian firms," Research series 200205-13, National Bank of Belgium. [Downloadable!]
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  15. Philippe Jeanfils, 2001. "A guided tour of the world of rational expectations models and optimal policies," Research series 2001-06, National Bank of Belgium. [Downloadable!]
    Other versions:
  16. Paul Butzen & Catherine Fuss & Philip Vermeulen, 2002. "The impact of uncertainty on investment plans," Research series 200205-5, National Bank of Belgium. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Johan Devriese & Janet Mitchell, 2005. "Liquidity risk in securities settlement," Research series 200507-2, National Bank of Belgium. [Downloadable!]
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  2. Nancy Masschelein, 2007. "Monitoring pro-cyclicality under the capital requirements directive : preliminary concepts for developing a framework," Documents series 200711-22, National Bank of Belgium. [Downloadable!]
  3. Rozália Pál & Roman Kozhan, 2006. "Firms' investment under financing constraints. An euro area investigation," IEHAS Discussion Papers 0606, Institute of Economics, Hungarian Academy of Sciences, revised 21 Jul 2006. [Downloadable!]
  4. George Hondroyiannis & Sophia Lazaretou, 2004. "Inflation persistence during periods of structural change - an assessment using Greek data," Working Paper Series 370, European Central Bank. [Downloadable!]
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  5. Frédéric Lagneaux, 2008. "Economic Importance of Belgian Transport Logistics," Documents series 200801-01, National Bank of Belgium. [Downloadable!]
  6. Annick Bruggeman, 2007. "Can Excess Liquidity Signal an Asset Price Boom?," Research series 200708-08, National Bank of Belgium. [Downloadable!]
  7. Thorsten V. Koeppl & Cyril Monnet, 2004. "Guess what: it's the settlements!," Working Paper Series 375, European Central Bank. [Downloadable!]
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  8. Helga De Doncker, 2006. "Crédits aux particuliers - Analyse des données de la Centrale des Crédits aux Particuliers," Documents series 200601-1, National Bank of Belgium. [Downloadable!]
  9. Carine Swartenbroekx, 2007. "The gas chain : influence of its specificities on the liberalisation process," Documents series 200711-24, National Bank of Belgium. [Downloadable!]
  10. Janet Mitchell, 2005. "Financial intermediation theory and implications for the sources of value in structured finance markets," Documents series 200507-1, National Bank of Belgium. [Downloadable!]
  11. François Coppens & Fernando Gonzáles & Gerhard Winkler, 2007. "The performance of credit rating systems in the assessment of collateral used in Eurosystem monetary policy operations," Research series 200710-12, National Bank of Belgium. [Downloadable!]
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