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Investment Under Monetary Uncertainty: A Panel Investigation

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  • Andrew Hughes Hallett

    ()
    (Department of Economics, Vanderbilt University and CEPR)

  • Gert Peersman

    ()
    (Department of Financial Economics, Ghent University, Gent, Belgium and Bank of England)

  • Laura Piscitelli

    ()
    (Bank of England)

Abstract

There is a presumption in the literature that price or exchange rate uncertainty, or uncertainty in the monetary conditions underlying them, will have a negative effect on investment. Some argue that this negative effect will be extended by imperfect competition. However, models of "irreversible" investment show that the situation is more complicated than that. In these models, investment expenditures are affected by the scrapping price available on world markets; and also by the opportunity cost of waiting rather than investing. The impact of uncertainty is therefore going to depend on the type of industry, and hence on the industrial structure of the economy concerned. In addition, it may depend on the persistence of any price "misalignments" away from competitive equilibrium. In this paper, we put these theoretical predictions to the test. We estimate investment equations for 13 different industries using data for 9 OECD countries over the period 1970-2000. We find the impact of price uncertainty is negative or insignificant in all but one case. But the impact of (nominal) exchange rate uncertainty is negative in only 6 cases. It is positive in 4 cases, and insignificant in 3 others. In addition, there are conflicting effects from the real exchange rate. The net effect depends on whether the source of the uncertainty is in domestic markets or in foreign markets.

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File URL: http://www.accessecon.com/pubs/VUECON/vu04-w06.pdf
File Function: First version, 2004
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0406.

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Date of creation: Jan 2004
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Handle: RePEc:van:wpaper:0406

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: invetment expenditures; price and exchange rate uncertainty; PMGE estimators;

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  1. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  2. Philippe Bacchetta & Eric van Wincoop, 2002. "A theory of the currency denomination of international trade," International Finance Discussion Papers 747, Board of Governors of the Federal Reserve System (U.S.).
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