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Investment Under Monetary Uncertainty: A Panel Investigation

Author

Listed:
  • Andrew Hughes Hallett

    (Department of Economics, Vanderbilt University and CEPR)

  • Gert Peersman

    (Department of Financial Economics, Ghent University, Gent, Belgium and Bank of England)

  • Laura Piscitelli

    (Bank of England)

Abstract
There is a presumption in the literature that price or exchange rate uncertainty, or uncertainty in the monetary conditions underlying them, will have a negative effect on investment. Some argue that this negative effect will be extended by imperfect competition. However, models of "irreversible" investment show that the situation is more complicated than that. In these models, investment expenditures are affected by the scrapping price available on world markets; and also by the opportunity cost of waiting rather than investing. The impact of uncertainty is therefore going to depend on the type of industry, and hence on the industrial structure of the economy concerned. In addition, it may depend on the persistence of any price "misalignments" away from competitive equilibrium. In this paper, we put these theoretical predictions to the test. We estimate investment equations for 13 different industries using data for 9 OECD countries over the period 1970-2000. We find the impact of price uncertainty is negative or insignificant in all but one case. But the impact of (nominal) exchange rate uncertainty is negative in only 6 cases. It is positive in 4 cases, and insignificant in 3 others. In addition, there are conflicting effects from the real exchange rate. The net effect depends on whether the source of the uncertainty is in domestic markets or in foreign markets.

Suggested Citation

  • Andrew Hughes Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Investigation," Vanderbilt University Department of Economics Working Papers 0406, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:0406
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    References listed on IDEAS

    as
    1. Bacchetta, Philippe & van Wincoop, Eric, 2005. "A theory of the currency denomination of international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 295-319, December.
    2. Andrew Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Data Investigation," Economic Change and Restructuring, Springer, vol. 31(2), pages 137-162, June.
    3. Pesaran, M. H. & Zhao, Z., 1998. "Bias Reduction in Estimating Long-run Relationships from Dynamic Heterogenous Panels," Cambridge Working Papers in Economics 9802, Faculty of Economics, University of Cambridge.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Andrew Hallett & Gert Peersman & Laura Piscitelli, 2004. "Investment Under Monetary Uncertainty: A Panel Data Investigation," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 137-162, June.
    2. Landon, Stuart & Smith, Constance E., 2009. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 813-835, September.
    3. Martin Ruzima & Micheal Kofi Boachie, 2018. "Exchange rate uncertainty and private investment in BRICS economies," Asia-Pacific Journal of Regional Science, Springer, vol. 2(1), pages 65-77, April.

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    More about this item

    Keywords

    invetment expenditures; price and exchange rate uncertainty; PMGE estimators;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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