The Role of Relative Price Volatility in the Efficiency of Investment Allocation

Arbeitspapier

This paper estimates the impact of relative price volatility on sector-level investment allocation using a panel of 65 countries with data for 26 manufacturing industries over the period 1985-2003. Results indicate that volatility distorts efficient investment allocation in that investment is not necessarily devoted to relatively more productive sectors, especially in emerging market economies that are highly exposed and may lack the necessary institutions to deal with it successfully. This is evidence in support of theories suggesting that relative price volatility provides incentives for entrepreneurs to adopt more “malleable” but less productive production technologies, enabling them to accommodate more easily abrupt and frequent changes in relative prices, but at the cost of using less productive technologies.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IDB Working Paper Series ; No. IDB-WP-208

Classification and Topics

• Classification: Wirtschaft ; Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity ; Investment; Capital; Intangible Capital; Capacity ; Innovation and Invention: Processes and Incentives ; Industry Studies: Manufacturing: General
• Subject: Sector-level TFP ; Relative price volatility ; Investment allocation ; Financial crises ; Emerging markets ; Malleable technologies

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cavallo, Eduardo ; Galindo, Arturo ; Izquierdo, Alejandro ; Leon, John Jairo
• Event: Veröffentlichung
• (who): Inter-American Development Bank (IDB)
• (where): Washington, DC
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/89093
• Last update: 10.03.2025, 11:44 AM CET