Gray's anatomy: Understanding uncertainty

• Main Authors: SUN, Juliana Yu, SAMANIEGO, Roberto M.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Uncertainty; technology; industry growth; depreciation; capital adjustment costs; investment lumpiness; real options; Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/2032; https://ink.library.smu.edu.sg/context/soe_research/article/3031/viewcontent/MPRA_paper_72787.pdf
• Institution: Singapore Management University

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