Uncertainty and Investment Options
AbstractThis paper develops a simple model in which uncertainty about future tax policy leads to a temporary reduction in investment. The basic idea is that policy uncertainty creates uncertainty about the profitability of investment. If the uncertainty is likely to be resolved in the not-too-distant future, firms rationally delay committing resources to irreversible projects, reducing current investment. When the uncertainty is resolved, investment recovers, generating a temporary boom. The size of the boom depends on the realization of the fiscal uncertainty, with lower realizations of the tax rate producing larger booms.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 251.
Date of creation: 2013
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-05 (All new papers)
- NEP-DGE-2013-10-05 (Dynamic General Equilibrium)
- NEP-PBE-2013-10-05 (Public Economics)
- NEP-PPM-2013-10-05 (Project, Program & Portfolio Management)
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