Uncertainty and Investment Dynamics

Nicholas Bloom, John van Reenen and Stephen Bond

No 12383, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impact effect of demand shocks on investment. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time, and also empirically for a panel of manufacturing firms. These cautionary effects of uncertainty are large - going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks. This implies the responsiveness of firms to any given policy stimulus may be much lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.

JEL-codes: C23 D8 D92 E22 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-bec, nep-fmk and nep-mac
Note: EFG PR
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Citations: View citations in EconPapers (27)

Published as Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," Review of Economic Studies, Blackwell Publishing, vol. 74(2), pages 391-415, 04.

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Related works:
Journal Article: Uncertainty and Investment Dynamics (2007)
Working Paper: Uncertainty and Investment Dynamics (2006)
Working Paper: Uncertainty and investment dynamics (2006)
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