Gray's Anatomy: Understanding Uncertainty

Samaniego, Roberto and Sun, Juliana (2016): Gray's Anatomy: Understanding Uncertainty.

Abstract

We explore the key mechanisms whereby uncertainty impacts the business cycle by exploring the interaction of uncertainty with growth in industries with different technologies of production. We find that uncertainty shocks are particularly detrimental to growth in industries with rapid capital depreciation or high investment adjustment costs. The findings are consistent with real options theory: uncertainty leads firms to delay investment in new projects, but high depreciation and fixed costs of investment make delay more costly. On the other hand, we do not find evidence of a significant role of financial markets in the generation nor propagation of uncertainty shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Uncertainty, technology, industry growth, depreciation, capital adjustment costs, investment lumpiness, real options.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

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