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Monetary Instability, the Predictability of Prices and the Allocation of Investment: An Empirical Investigation Using UK Panel Data

Paul Beaudry (), Mustafa Caglayan () and Fabio Schiantarelli ()

No 312., Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: It is often argued that monetary instability reduces the informational content of market signals and thereby hinders the efficient allocation of investment. In this paper we use a signal extraction framework to give empirical content to this idea. In particular, we show why this framework predicts that, as monetary uncertainty decreases, the cross-sectional distribution of investment widens. We then explore this hypothesis using panel data information for UK companies over twenty years. Our data generally support the view that monetary instability may affect investment allocation through its effect on the predictability of prices.

Keywords: investment; price expectations; signal extraction (search for similar items in EconPapers)
JEL-codes: E22 E32 (search for similar items in EconPapers)
Date: 1996-02
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Published, American Economic Review, 91, 648-662, 2001

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