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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 251.
Date of creation: 2013
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
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)
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.:
- Baldwin, Carliss Y. & Meyer, Richard F., 1979. "Liquidity preference under uncertainty: A model of dynamic investment in illiquid opportunities," Journal of Financial Economics, Elsevier, vol. 7(4), pages 347-374, December.
- Bernanke, Ben S, 1983.
"Irreversibility, Uncertainty, and Cyclical Investment,"
The Quarterly Journal of Economics,
MIT Press, vol. 98(1), pages 85-106, February.
- Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
- Hopenhayn, H. & Maniagurria, M.E., 1996.
"Policy Variability and Economic Growth,"
RCER Working Papers
422, University of Rochester - Center for Economic Research (RCER).
- Nicholas Bloom, 2009.
"The Impact of Uncertainty Shocks,"
Econometric Society, vol. 77(3), pages 623-685, 05.
- Brandon Julio & Youngsuk Yook, 2012. "Political Uncertainty and Corporate Investment Cycles," Journal of Finance, American Finance Association, vol. 67(1), pages 45-84, 02.
- Jovanovic, Boyan, 2009.
"Investment options and the business cycle,"
Journal of Economic Theory,
Elsevier, vol. 144(6), pages 2247-2265, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.