A recent literature suggests that because investment expenditures are irreversible and can be delayed, they may be highly sensitive to uncertainty. We briefly summarize the theory, stressing its empirical implications. We then use cross-section and time-series data for a set of developing and industrialized countries to explore the relevance of the theory for aggregate investment. We find that the volatility of the marginal profitability of capital - a summary measure of uncertainty - affects investment as the theory suggests, but the size of the effect is moderate, and is greatest for developing countries. We also find that this volatility has little correlation with indicia of political instability used in recent studies of growth, as well as several indicia of economic instability. Only inflation is highly correlated with this volatility, and is also a robust explanator of investment
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4380.
Length: Date of creation: Jun 1993 Date of revision: Publication status: published as NBER Macroeconomics Annual 1993, vol. 8, (MIT Press, Cambridge), p. 259-302 Handle: RePEc:nbr:nberwo:4380
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Find related papers by JEL classification: E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
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.:
Caballero, Ricardo J, 1992.
"A Fallacy of Composition,"
American Economic Review,
American Economic Association, vol. 82(5), pages 1279-92, December.
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Ricardo J. Caballero, 1997.
"Aggregate Investment,"
NBER Working Papers
6264, National Bureau of Economic Research, Inc.
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