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Investment Under Monetary Uncertainty: A Panel Data Investigation

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  • Andrew Hallett
  • Gert Peersman
  • Laura Piscitelli

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 nine OECD countries over the period 1970–2000. We find that the impact of price uncertainty is negative or insignificant in all but one case whereas the impact of (nominal) exchange rate uncertainty is negative in only six cases, positive in four cases, and insignificant in three 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. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Andrew Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Data Investigation," Economic Change and Restructuring, Springer, vol. 31(2), pages 137-162, June.
  • Handle: RePEc:kap:ecopln:v:31:y:2004:i:2:p:137-162
    DOI: 10.1007/s10663-004-1164-2
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    References listed on IDEAS

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    1. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages 55-67, March.
    2. Hsiao, C. & Pesaran, M. H. & Tahmiscioglu, A. K., 1998. "Bayes Estimation of Short-run Coefficients in Dynamic Panel Data Models," Cambridge Working Papers in Economics 9804, Faculty of Economics, University of Cambridge.
    3. Bacchetta, Philippe & van Wincoop, Eric, 2005. "A theory of the currency denomination of international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 295-319, December.
    4. Andrew Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Data Investigation," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 137-162, June.
    5. Pesaran, M. H. & Zhao, Z., 1998. "Bias Reduction in Estimating Long-run Relationships from Dynamic Heterogenous Panels," Cambridge Working Papers in Economics 9802, Faculty of Economics, University of Cambridge.
    6. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    7. Yongcheol Shin & Ron P Smith & Mohammad Hashem Pesaran, 1998. "Pooled Mean Group Estimation of Dynamic Heterogeneous Panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
    8. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    9. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. " What Do We Know about Investment under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-153, April.
    10. Andrew Blake, 1999. "An Artificial Neural Network System of Leading Indicators," National Institute of Economic and Social Research (NIESR) Discussion Papers 144, National Institute of Economic and Social Research.
    11. Julia Darby & Andrew Hughes Hallett & Jonathan Ireland & Laura Piscitelli, 2000. "Exchange Rate Uncertainty and Business Sector Investment," Econometric Society World Congress 2000 Contributed Papers 0600, Econometric Society.
    12. Joseph P. Byrne & E. Philip Davis, 2005. "Investment and Uncertainty in the G7," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 1-32, April.
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    Cited by:

    1. Michael McMahon & Gabriel Sterne & Jamie Thompson, 2005. "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England.
    2. Andrew Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Data Investigation," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 137-162, June.
    3. Andrew Hughes Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Investigation," Vanderbilt University Department of Economics Working Papers 0406, Vanderbilt University Department of Economics.
    4. Landon, Stuart & Smith, Constance E., 2009. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 813-835, September.

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