Working Paper: NBER ID: w4380
Authors: Robert S. Pindyck; Andrés Solimano
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
Keywords: Investment; Economic Instability; Volatility; Developing Countries
JEL Codes: E22; E32; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| volatility of marginal profitability of capital (D25) | investment decisions (G11) |
| inflation (E31) | volatility of marginal profitability of capital (D25) |
| volatility of marginal profitability of capital (D25) | investment (G31) |
| inflation (E31) | investment (G31) |