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Does inflation harm corporate investment? Empirical evidence from OECD countries

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  • Ciżkowicz, Piotr
  • Rzońca, Andrzej

Abstract

Theoretical models point at various channels of the impact of inflation on corporate investment. This article attempts to answer the question what are the direction and strength of this possible impact examining the relationship between corporate investment and inflation on the sample of 21 OECD countries in the years 1960-2005. The obtained negative relationship, statistically and economically significant, proves robust to changes in the specification of the estimated equation, estimators, frequency of variables used in the study and analysed period. Moreover, the results obtained suggest nonlinear character of this relationship: marginal effect on corporate investment is higher at inflation rates between 3 and 5.5 per cent. These results suggest that the impact of inflation on corporate investment dynamics may be the source of nonlinear nature of the relationship between GDP growth and inflation identified in previous empirical studies. Finally, taking into account the direct impact of inflation on investment, variables approximating the cost of capital utilisation prove to be statistically insignificant determinants of corporate investment.

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  • Ciżkowicz, Piotr & Rzońca, Andrzej, 2012. "Does inflation harm corporate investment? Empirical evidence from OECD countries," Economics Discussion Papers 2012-63, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201263
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    More about this item

    Keywords

    investment; inflation; panel data models; monetary policy;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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