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Economic Instability and Aggregate Investment

55 Pages Posted: 29 Dec 2000  

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Andres Solimano

World Bank

Date Written: June 1993

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

Suggested Citation

Pindyck, Robert S. and Solimano, Andres, Economic Instability and Aggregate Investment (June 1993). NBER Working Paper No. w4380. Available at SSRN: https://ssrn.com/abstract=245842

Robert S. Pindyck (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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617-253-6641 (Phone)
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HOME PAGE: http://web.mit.edu/rpindyck/www/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Andres Solimano

World Bank ( email )

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Washington, DC 20433
United States

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