Advanced Search
MyIDEAS: Login

Economic instability and aggregate investment

Contents:

Author Info

  • Pindyck, Robert S.
  • Solimano, Andres

Abstract

Recent literature suggests that because investment expenditures are irreversible and can be delayed, they may be highly sensitive to uncertainty. The authors briefly summarize the theory, stressing its empirical implications. Then, using cross-section and time-series data for a set of developing and industrial countries, they explore the empirical relevance of irreversibility and uncertainty to aggregate investment. They find that: (a) the volatility of the marginal profitability of capital (a summary measure of uncertainty) affects investment as the theory suggests, but the effect is moderate, and greatest for developing countries; (b)this volatility has little correlation with indices of political instability used in recent studies of growth; (c) inflation is highly correlated with this volatility and is a robust determinant of investment and the marginal profitability ofcapital. The volatility of the real exchange rate also has an independent contribution in explaining investment; and (d) the relationship between inflation and investment is nonlinear, and different thresholds of inflation, where the relationship with investment becomes stronger, were detected for a group of high-inflation countries in Latin America and low-inflation economies in the Organization for Economic Cooperation and Development (OECD).

Download Info

If 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.
File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1993/06/01/000009265_3961004211238/Rendered/PDF/multi0page.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1148.

as in new window
Length:
Date of creation: 30 Jun 1993
Date of revision:
Handle: RePEc:wbk:wbrwps:1148

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Email:
Web page: http://www.worldbank.org/
More information through EDIRC

Related research

Keywords: Economic Theory&Research; Environmental Economics&Policies; International Terrorism&Counterterrorism; Banks&Banking Reform; ICT Policy and Strategies;

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
  2. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June.
  3. Andrew B. Abel & Olivier J. Blanchard, 1987. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
  4. Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-57, June.
  5. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
  6. Leahy, J.V., 1991. "The Optimality of Myopic Behaviour in a Competitive Model of Entry and Exit," Harvard Institute of Economic Research Working Papers 1566, Harvard - Institute of Economic Research.
  7. Caballero, R.J., 1990. "A Fallacy Of Composition," Discussion Papers 1990_01, Columbia University, Department of Economics.
  8. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September.
  9. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
  10. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  11. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping Hyperinflations Past and Present," NBER Working Papers 1810, National Bureau of Economic Research, Inc.
  12. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, vol. 5(2), pages 258-266, October.
  13. Aizenman, Joshua & Marion, Nancy P, 1993. "Policy Uncertainty, Persistence and Growth," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 145-63, June.
  14. Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May.
  15. Saul Lach & Rafael Rob, 1996. "R&D, Investment, and Industry Dynamics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 217-249, 06.
  16. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Ricardo J. Caballero & Robert S. Pindyck, 1996. "Uncertainty, Investment, and Industry Evolution," NBER Working Papers 4160, National Bureau of Economic Research, Inc.
  18. Serven, Luis & Solimano, Andres, 1992. "Private Investment and Macroeconomic Adjustment: A Survey," World Bank Research Observer, World Bank Group, vol. 7(1), pages 95-114, January.
  19. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  20. repec:fth:coluec:541 is not listed on IDEAS
  21. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
  22. Corbo, Vittorio & Solimano, Andres, 1991. "Chile's experience with stabilization, revisited," Policy Research Working Paper Series 579, The World Bank.
  23. Scott, Louis O., 1987. "Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(04), pages 419-438, December.
  24. Schmidt-Hebbel, Klaus & Webb, Steven B. & Corsetti, Giancarlo, 1991. "Household saving in developing countries : first cross-country evidence," Policy Research Working Paper Series 575, The World Bank.
  25. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  26. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
  27. Cukierman, Alex, 1980. "The Effects of Uncertainty on Investment under Risk Neutrality with Endogenous Information," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 462-75, June.
  28. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
  29. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
  30. Pindyck, Robert S, 1993. "A Note on Competitive Investment under Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 273-77, March.
  31. Pfeffermann, G.P. & Madarassy, A., 1992. "Trends in Private Investment in Developing Countries," Papers 16, World Bank - International Finance Corporation.
  32. Solimano, Andres, 1992. "Understanding the investment cycle in adjustment programs : evidence from reforming economies," Policy Research Working Paper Series 912, The World Bank.
  33. Serven, Luis & Solimano, Andres, 1993. "Debt crisis, adjustment policies and capital formation in developing countries: Where do we stand?," World Development, Elsevier, vol. 21(1), pages 127-140, January.
  34. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  35. Summers, Robert & Heston, Alan, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 327-68, May.
  36. Dornbusch, Rudiger, 1990. "Policies to Move from Stabilization to Growth," CEPR Discussion Papers 456, C.E.P.R. Discussion Papers.
  37. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
  38. Lach, Saul & Schankerman, Mark, 1989. "Dynamics of R&D and Investment in the Scientific Sector," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 880-904, August.
  39. Pfeffermann, G.P. & Madarassy, A., 1992. "Trend in Private Investment in Developing Countries," Papers 14, World Bank - International Finance Corporation.
  40. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1148. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.