Investment in Inflationary Economies

Author/Editor:

Eduardo Levy Yeyati

Publication Date:

September 1, 1996

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper presents a model of irreversible investment under uncertainty, where investment takes place whenever a threshold level of marginal returns is reached. The threshold depends positively on price volatility; a change from high to low inflation induces an upward capital stock adjustment. In economies that move in and out of temporary stabilizations, the observed effect is a negative inflation-investment correlation that replicates previous empirical findings, due to purely short-term dynamics. I study how this correlation is affected by the expected duration of each regime. Empirical evidence from ten inflationary economies confirms the predictions of the model.

Series:

Working Paper No. 1996/105

Subject:

Consumer price indexes Inflation Price stabilization Prices

English

Publication Date:

September 1, 1996

ISBN/ISSN:

9781451947571/1018-5941

Stock No:

WPIEA1051996

Pages:

32

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