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Gray's Anatomy: Understanding Uncertainty

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  • Samaniego, Roberto
  • Sun, Juliana

Abstract

We explore the key mechanisms whereby uncertainty impacts the business cycle by exploring the interaction of uncertainty with growth in industries with different technologies of production. We find that uncertainty shocks are particularly detrimental to growth in industries with rapid capital depreciation or high investment adjustment costs. The findings are consistent with real options theory: uncertainty leads firms to delay investment in new projects, but high depreciation and fixed costs of investment make delay more costly. On the other hand, we do not find evidence of a significant role of financial markets in the generation nor propagation of uncertainty shocks.

Suggested Citation

  • Samaniego, Roberto & Sun, Juliana, 2016. "Gray's Anatomy: Understanding Uncertainty," MPRA Paper 72787, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72787
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    References listed on IDEAS

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    Cited by:

    1. Sangyup Choi & Davide Furceri & João Tovar Jalles, 2017. "Fiscal Stabilization and Growth: Evidence from Industry-level Data for Advanced and Developing Economies," IMF Working Papers 2017/198, International Monetary Fund.

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    More about this item

    Keywords

    Uncertainty; technology; industry growth; depreciation; capital adjustment costs; investment lumpiness; real options.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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