Investment in Inflationary Economies

September 1, 1996

Preview Citation

Format: Chicago

Eduardo Levy Yeyati. Investment in Inflationary Economies, (USA: International Monetary Fund, 1996) accessed September 19, 2024

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.

Subject: Consumer price indexes, Inflation, Price stabilization, Prices

Keywords: Aggregate investment, Consumer price indexes, CPI inflation rates, Inflation, Inflation-investment relation, Investment behavior, Investment decision rule, Investment-volatility relation, Price stabilization, Price volatility, Stability-investment relationship, Threshold investment decision rule, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1996/105
Stock No:

WPIEA1051996
ISBN:

9781451947571
ISSN:

1018-5941

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