TY  - JOUR
AU  - Bloom,Nick
AU  - Reenen,John Van
AU  - Bond,Stephen
TI  - Uncertainty and Investment Dynamics
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12383
PY  - 2006
Y2  - July 2006
UR  - http://www.nber.org/papers/w12383
L1  - http://www.nber.org/papers/w12383.pdf
N1  - Author contact info:
Nicholas Bloom
Stanford University
Department of Economics
579 Serra Mall
Stanford, CA 94305-6072
Tel: 650/725-3266
Fax: 650/725-5702
E-Mail: nbloom@stanford.edu

John Van Reenen
Department of Economics
London School of Economics
Centre for Economic Performance
Houghton Street
London WC2A 2AE
UNITED KINGDOM
Tel: 00 44 207/955-6976
Fax: 00 44 207/955-6848
E-Mail: j.vanreenen@lse.ac.uk
M2  - featured in NBER digest on 2006-07-31
AB  - 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 %u2013 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.
ER  -