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Economic Instability and Aggregate Investment

Robert S. Pindyck and Andrés Solimano
NBER Macroeconomics Annual
Vol. 8 (1993), pp. 259-303
DOI: 10.2307/3585033
Stable URL: http://www.jstor.org/stable/3585033
Page Count: 45
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Economic Instability and Aggregate Investment
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Abstract

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-sectional 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.

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