Real and Financial Uncertainty and Investment Decisions
University of Urbino Carlo Bo - Faculty of Economics; Università Politecnica delle Marche - Money and Finance Research Group (Mo.Fi.R.)
Department of Economics & Law
Journal of Macroeconomics, Vol. 22, No. 3, Summer 2000
This paper aims at analyzing the role of uncertainty on investment. In our analysis, we will follow recent economic literature concerning stochastic models of irreversible investment and restrict our attention to the Italian economy. We show that theoretically, and in the presence of irreversibility, demand and interest rate uncertainty both reduce demand for capital. Our empirical results support the traditional interpretation according to which expected demand growth rates positively affect investment, while the interest rate level is negatively correlated to the accumulation rate. As for uncertainty, investment decisions in Italy are negatively affected by demand volatility, while interest rate volatility seems to play no significant role.
JEL Classification: E22
Date posted: September 19, 2000