Firms' investment decisions in response to demand and price uncertainty

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 347

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Theory ; Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity ; Criteria for Decision-Making under Risk and Uncertainty ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
• Subject: Investment ; panel data ; real options ; survey data ; uncertainty

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fuss, Catherine ; Vermeulen, Philip
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/152781
• Last update: 10.03.2025, 11:42 AM CET