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Investment in Inflationary Economies

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  • Eduardo Levy Yeyati

Abstract

The paper presents a model of irreversible investment under uncertainty, where investment takes place whenever a threshold level of marginal returns is reached. The threshold depends positively on price volatility; a change from high to low inflation induces an upward capital stock adjustment. In economies that move in and out of temporary stabilizations, the observed effect is a negative inflation-investment correlation that replicates previous empirical findings, due to purely short-term dynamics. I study how this correlation is affected by the expected duration of each regime. Empirical evidence from ten inflationary economies confirms the predictions of the model.

Suggested Citation

  • Eduardo Levy Yeyati, 1996. "Investment in Inflationary Economies," IMF Working Papers 96/105, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:96/105
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    Cited by:

    1. Serven, Luis, 1997. "Uncertainty, instability, and irreversible investment : theory, evidence, and lessons for Africa," Policy Research Working Paper Series 1722, The World Bank.

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