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The investment response to temporary commodity price shocks

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  • Richard Mash

Abstract

The paper is concerned with the investment response to temporary trade shocks when capital in the commodity and import-competing sectors is irreversible once installed. Previous literature has argued in general terms that investment is likely to rise in response to sharp relative price movements because the return to capital in one of the sectors will increase. A rigorous model of investment under uncertainty in the two-sector commodity price shocks context is developed and used to investigate this issue. It is shown that investment booms in response to commodity price shocks are likely but not certain to occur and a boom at the end of the shock may also be expected. The predictions of the theory are shown to be consistent with the evidence from a small sample of countries during the late 1970s coffee/cocoa boom.

Suggested Citation

  • Richard Mash, 1998. "The investment response to temporary commodity price shocks," CSAE Working Paper Series 1998-14, Centre for the Study of African Economies, University of Oxford.
    • Handle: RePEc:csa:wpaper:1998-14
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    File URL: https://ora.ox.ac.uk/objects/uuid:0f6447a7-e28c-48ea-8ac3-66d26f4b9d78
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    Cited by:

    1. Jan Dehn, 2000. "Private Investment in Developing Countries: The Effects of Commodity Shocks and Uncertainty," Economics Series Working Papers WPS/2000-11, University of Oxford, Department of Economics.
    2. Grivas Chiyaba, 2021. "The components and determinants of FDI within firms: A case study of Zambia," Economics Discussion Papers em-dp2021-09, Department of Economics, University of Reading.

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