Investment Under Monetary Uncertainty: A Panel Investigation

Andrew Hughes Hallett, Gert Peersman () and Laura Piscitelli

No 406, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: There is a presumption in the literature that price or exchange rate uncertainty, or uncertainty in the monetary conditions underlying them, will have a negative effect on investment. Some argue that this negative effect will be extended by imperfect competition. However, models of "irreversible" investment show that the situation is more complicated than that. In these models, investment expenditures are affected by the scrapping price available on world markets; and also by the opportunity cost of waiting rather than investing. The impact of uncertainty is therefore going to depend on the type of industry, and hence on the industrial structure of the economy concerned. In addition, it may depend on the persistence of any price "misalignments" away from competitive equilibrium. In this paper, we put these theoretical predictions to the test. We estimate investment equations for 13 different industries using data for 9 OECD countries over the period 1970-2000. We find the impact of price uncertainty is negative or insignificant in all but one case. But the impact of (nominal) exchange rate uncertainty is negative in only 6 cases. It is positive in 4 cases, and insignificant in 3 others. In addition, there are conflicting effects from the real exchange rate. The net effect depends on whether the source of the uncertainty is in domestic markets or in foreign markets.

Keywords: invetment expenditures; price and exchange rate uncertainty; PMGE estimators (search for similar items in EconPapers)
JEL-codes: E22 F21 (search for similar items in EconPapers)
Date: 2004-01
New Economics Papers: this item is included in nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0406

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