Uncertainty and Investment Dynamics

Uncertainty and Investment Dynamics

August 2006 | Nick Bloom, Stephen Bond and John Van Reenen
This paper examines the impact of uncertainty on investment dynamics, particularly in the context of partial irreversibility. The authors use both numerical simulations and empirical data to demonstrate that higher uncertainty reduces the responsiveness of firms to demand shocks. Numerical simulations show that firms become more cautious when investing or disinvesting, leading to a weaker response to demand shocks. Empirical analysis of a panel of UK manufacturing firms from 1972 to 1991 confirms these findings, indicating that firms subject to greater uncertainty exhibit more cautious investment behavior and a convex response to real sales growth. The paper also suggests that observed fluctuations in uncertainty can significantly influence firm-level investment decisions, potentially reducing the responsiveness of firms to policy stimuli during periods of high uncertainty.This paper examines the impact of uncertainty on investment dynamics, particularly in the context of partial irreversibility. The authors use both numerical simulations and empirical data to demonstrate that higher uncertainty reduces the responsiveness of firms to demand shocks. Numerical simulations show that firms become more cautious when investing or disinvesting, leading to a weaker response to demand shocks. Empirical analysis of a panel of UK manufacturing firms from 1972 to 1991 confirms these findings, indicating that firms subject to greater uncertainty exhibit more cautious investment behavior and a convex response to real sales growth. The paper also suggests that observed fluctuations in uncertainty can significantly influence firm-level investment decisions, potentially reducing the responsiveness of firms to policy stimuli during periods of high uncertainty.
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