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

  • Paul Beaudry

    (University of British Columbia)

  • Mustafa Caglayan

    (University of Liverpool)

  • Fabio Schiantarelli


    (Boston College)

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.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 312..

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Length: 36 pages
Date of creation: Feb 1996
Date of revision:
Publication status: Published, American Economic Review, 91, 648-662, 2001
Handle: RePEc:boc:bocoec:312
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
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