Abstract not found

We uncover a significant negative correlation between various volatility measures and private investment in developing countries, even when adding the standard control variables. No such correlation is uncovered when the investment measure is the sum of private and public investment spending. Indeed, public investment spending is positively correlated with some measures of volatility. These findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data. We provide several possible interpretations for our findings. Nonlinearities in preferences or budget constraints can cause volatility to have first-order negative effects on private investment.

We consider the impact of tax policy uncertainty on firm level and aggregate investment, comparing investment behavior when uncertainty is due to a shock following Geometric Brownian Motion (GBM) versus when random discrete jumps in tax policy occur. Expectations of the likelihood of a tax policy switch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax policy uncertainty. Aggregate investment simulations indicate that capital formation is adversely affected by increases in uncertainty in the traditional GBM model but can be enhanced in the jump process model. We also find that mean preserving spreads are attractive to firms when they have discretion over real behavior. In both models, a mean preserving spread lowers the cost of capital conditional on investment as firms shift investment from high to low cost periods. Ex ante mean preserving spreads in general lead to ex post decreases in the price of capital. We relate this 1 It is often said that nothing is certain in life except death and taxes. While death is

Abstract not found

Abstract not found

Abstract not found

This paper shows that with (partial) irreversibility higher uncertainty reduces the responsiveness of investment to demand shocks. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time and also empirically for a panel of manufacturing firms. These “cautionary effects” of uncertainty are large—going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks. This implies the responsiveness of firms to any given policy stimulus may be much weaker in periods of high uncertainty, such as after the 1973 oil crisis and September 11, 2001.

Abstract not found

This paper studies the impact of uncertainty on firm's investment outlays using the database of the Deutsche Bundesbank's corporate balance sheet statistics. The sample used for estimation contains 6,745 firms with almost 50,000 observations, covering the years 1987-1997. We estimate the effect of sales uncertainty and cost uncertainty on investment demand. Two key results emerge: First, there is a moderately strong and consistently negative effect of uncertainty on investment. If both uncertainty indicators are increased by one standard deviation, the estimated investment demand will fall by 6 % of its mean. Second, sales uncertainty and cost uncertainty are of roughly equal importance for investment.

This paper examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country-time series data set. The paper builds a GARCH-based measure of real exchange rate volatility and finds that it has a strong negative impact on investment, after controlling for other standard investment determinants and taking into account their potential endogeneity. The impact of uncertainty is not uniform, however. There is some evidence of threshold effects, so that uncertainty only matters when it exceeds some critical level. In addition, the negative impact of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems.