Firms' Investment Decisions in Response to Demand and Price Uncertainty

37 Pages Posted: 10 Sep 2004

See all articles by Catherine Fuss

Catherine Fuss

National Bank of Belgium

Philip Vermeulen

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

We estimate the effect of demand and price uncertainty on firms' investment decisions from a panel of manufacturing firms. Uncertainty measures are derived from firms' subjective qualitative expectations. They are close to their theoretical counterparts, the variances of future demand and price shocks. We find that demand uncertainty depresses planned and realized investment, while price uncertainty is insignificant. This is consistent with the behavior of monopolistic firms with irreversible capital (Caballero, 1991). Further, firms revise their investment plans very little. They may do so in response to new information on sales growth, but not as a result of reduced uncertainty.

Keywords: investment, uncertainty, real options, survey data, panel data

JEL Classification: D21, D24, D81, D92, C23

Suggested Citation

Fuss, Catherine and Vermeulen, Philip, Firms' Investment Decisions in Response to Demand and Price Uncertainty (April 2004). ECB Working Paper No. 347. Available at SSRN: https://ssrn.com/abstract=532990

Catherine Fuss (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Philip Vermeulen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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