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Inflation and corporate investment – a critical survey

Author

Listed:
  • Piotr Ciżkowicz

    () (Warsaw School of Economics
    Ernst&Young Poland)

  • Marcin Hołda

    () (National Bank of Poland, Economic Institute
    Warsaw School of Economics)

  • Andrzej Rzońca

    () (National Bank of Poland, Monetary Policy Council
    Civil Development Forum)

Abstract

The analysis of inflation’s effect on investment can contribute to a deeper understanding of the benefits of a monetary policy oriented towards price stability. It can also help conduct such a policy effectively. We begin with a review of conclusions about the inflation-investment relationship that can be drawn from traditional monetary models with exogenous growth and no market imperfections. As these conclusions are ambiguous, models of this type could lead economic decision-makers to fail to take proper account of inflation’s impact on investment. We then survey research which, contrary to monetary exogenous growth models, takes account of market imperfections such as the asymmetry of information, uncertainty and nominal rigidities in the tax system. The analysis of the significance of these imperfections for the direction and magnitude of the relationship between inflation and investment forms the bulk of the article. We highlight, on the one hand, the key assumptions of the particular theories (and whether they are in keeping with stylized facts), and, on the other hand, the difficulties that empirical research faces when trying to verify the conclusions from these theories. Finally, we offer some conclusions on the basis of the conducted survey.

Suggested Citation

  • Piotr Ciżkowicz & Marcin Hołda & Andrzej Rzońca, 2010. "Inflation and corporate investment – a critical survey," Bank i Kredyt, Narodowy Bank Polski, vol. 41(6), pages 5-44.
  • Handle: RePEc:nbp:nbpbik:v:41:y:2010:i:6:p:5-44
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    References listed on IDEAS

    as
    1. Christopher F Baum & Mustafa Caglayan & Neslihan Ozkan, 2004. "The second moments matter: The response of bank lending behavior to macroeconomic uncertainty," Computing in Economics and Finance 2004 172, Society for Computational Economics.
    2. Evans, Martin, 1991. "Discovering the Link between Inflation Rates and Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 169-184, May.
    3. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ciżkowicz, Piotr & Rzońca, Andrzej, 2013. "Does inflation harm corporate investment? Empirical evidence from OECD countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 7, pages 1-38.
    2. Ciżkowicz, Piotr & Rzońca, Andrzej, 2010. "Inflation and corporate investment in selected OECD countries in the years 1960-2005 – an empirical analysis," MPRA Paper 29846, University Library of Munich, Germany.
    3. Wang, Yizhong & Chen, Carl R. & Chen, Lifang & Huang, Ying Sophie, 2016. "Overinvestment, inflation uncertainty, and managerial overconfidence: Firm level analysis of Chinese corporations," The North American Journal of Economics and Finance, Elsevier, vol. 38(C), pages 54-69.

    More about this item

    Keywords

    investment; inflation; monetary growth models; asymmetry of information; uncertainty; taxes;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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