Investment and uncertainty in a quadratic adjustment cost model: evidence from Brazil

• Main Author: Pereira,Rodrigo M.
• Publication Date: 2001
• Format: Article
• Language: eng
• Source: Revista Brasileira de Economia (Online)
• Download full: http://old.scielo.br/scielo.php?script=sci_arttext&pid=S0034-71402001000200006
• topic: aggregate investment; quadratic adjustment cost; integrated variables; garch-constructed uncertainty

This paper assesses empirically the sign of the uncertainty-investment relation in Brazil within a quadratic adjustment cost model. It is shown that these variables are negatively related in the Brazilian economy. The implication is that investment can be enlarged with the adoption of a sustainable macroeconomic policy that rules out uncertainty-yielding shocks, such as a huge devaluation in domestic currency, or defaults in internal and external debts. The paper also proposes a method for estimating the quadratic adjustment cost model when the endogenous variable is I(2) and the forcing variables are I(1). Since capital stock is typically an I(2) variable, the econometric insight seems particularly suited for models of investment.