To Buy or Not to Buy? Uncertainty, Irreversibility and Heterogeneous Investment Dynamics in Italian Company Data

June 1, 2004

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Domenico Lombardi, and Stephen Bond. To Buy or Not to Buy? Uncertainty, Irreversibility and Heterogeneous Investment Dynamics in Italian Company Data, (USA: International Monetary Fund, 2004) accessed December 3, 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

This study tests for the presence of real options effects induced by uncertainty and (partial) irreversibility on fixed capital investment using Italian company data. The approach recognizes that firm-level investment spending may, itself, be aggregated over multiple investment decisions in separate types of capital goods and emphasizes effects of uncertainty on short-run investment dynamics. Using a survey-based measure of uncertainty related to the assessment of managers responsible for the firms' investment plans, the study finds evidence of heterogeneous and nonlinear dynamics pointing to a slower adjustment of investment in response to demand shocks at higher levels of uncertainty. The results also point to an additional source of nonlinearity originating from a convex response of investment to demand shocks.

Subject: Bonds, Capital accumulation, Econometric analysis, Economic sectors, Estimation techniques, Financial institutions, Manufacturing, National accounts, Stocks

Keywords: Africa, Bonds, Capital accumulation, Capital stock, Demand shock, Estimation techniques, Firm level, Forecast error, Investment, Investment behavior, Investment series, Low-uncertainty firm, Manufacturing, Panel Data, Real Options, Stocks, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/104
Stock No:

WPIEA1042004
ISBN:

9781451948011
ISSN:

1018-5941

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