Economic Instability and Aggregate Investment

Robert Pindyck and Andres Solimano (asolimano@gmail.com)

No 4380, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A recent literature suggests that because investment expenditures are irreversible and can be delayed, they may be highly sensitive to uncertainty. We briefly summarize the theory, stressing its empirical implications. We then use cross-section and time-series data for a set of developing and industrialized countries to explore the relevance of the theory for aggregate investment. We find that the volatility of the marginal profitability of capital - a summary measure of uncertainty - affects investment as the theory suggests, but the size of the effect is moderate, and is greatest for developing countries. We also find that this volatility has little correlation with indicia of political instability used in recent studies of growth, as well as several indicia of economic instability. Only inflation is highly correlated with this volatility, and is also a robust explanator of investment

JEL-codes: D92 E22 (search for similar items in EconPapers)
Date: 1993-06
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (207)

Published as Economic Instability and Aggregate Investment , Robert S. Pindyck, Andrés Solimano. in NBER Macroeconomics Annual 1993, Volume 8 , Blanchard and Fischer. 1993

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Related works:
Chapter: Economic Instability and Aggregate Investment (1993)
Working Paper: Economic instability and aggregate investment (1993)
Working Paper: Economic instability and aggregate investment (1993)
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