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Firms' investment decisions in response to demand and price uncertainty

  • Catherine Fuss


    (National Bank of Belgium, Research Department)

  • Philip Vermeulen


    (National Bank of Belgium, Research Department)

We estimate the effect of demand and price uncertainty on firms' investment decisions from a panel of manufacturing firms. Uncertainty measures are derived from firms' subjective qualitative expectations. They are close to their theoretical counterparts, the variances of future demand and price shocks. We find that demand uncertainty depresses planned and realized investment, while price uncertainty is insignificant. This is consistent with the behavior of monopolistic firms with irreversible capital (Caballero, 1991). Further, firms revise their investment plans very little. They may do so in response to new information on sales growth, but not as a result of reduced uncertainty.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 45.

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Length: 33 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:nbb:reswpp:200404-2
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  9. Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
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