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Monetary Instability, the Predictability of Prices and the Allocation of Investment: An Empirical Investigation Using UK Panel Data

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  • Paul Beaudry

    (University of British Columbia)

  • Mustafa Caglayan

    (University of Liverpool)

  • Fabio Schiantarelli

    (Boston College)

Abstract

It is often argued that monetary instability reduces the informational content of market signals and thereby hinders the efficient allocation of investment. In this paper we use a signal extraction framework to give empirical content to this idea. In particular, we show why this framework predicts that, as monetary uncertainty decreases, the cross-sectional distribution of investment widens. We then explore this hypothesis using panel data information for UK companies over twenty years. Our data generally support the view that monetary instability may affect investment allocation through its effect on the predictability of prices.

Suggested Citation

  • Paul Beaudry & Mustafa Caglayan & Fabio Schiantarelli, 1996. "Monetary Instability, the Predictability of Prices and the Allocation of Investment: An Empirical Investigation Using UK Panel Data," Boston College Working Papers in Economics 312., Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:312
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    References listed on IDEAS

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    More about this item

    Keywords

    investment; price expectations; signal extraction;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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