The Uncertainty-Investment Relationship

Hjalmar Böhm () and Michael Funke

Quantitative Macroeconomics Working Papers from Hamburg University, Department of Economics

Abstract: Recent theoretical developments have highlighted the importance of irreversibility and uncertainty for investment demand. This paper presents a review of this literature with some new aspects. A structural q-type investment model is derived, which contains the information on the uncertainty effects of random variables that affect future profitability of firms. A general conclusion is that the effect of uncertainty upon investment and uncertainty is ambiguous. A necessary condition for any irreversibility-driven negative relationship between investment and uncertainty is the existence of imperfect competition.

Date: 1999-04
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