Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
965958 | Journal of Macroeconomics | 2009 | 14 Pages |
Abstract
We examine the impact of random changes in investment tax credit (ITC) policy on the irreversible investment decisions of a monopolistically competitive firm facing demand uncertainty. We examine the impact of increases in risk and changes in persistence in the ITC policy on investment behavior. Our results indicate that a temporary ITC (lower policy persistence) generally increases the variability of investment both in the short and the long-run. It lowers investment in the short-run and raises it in the long-run. Thus, perhaps surprisingly, a temporary ITC does not always lead to higher investment but always leads to more volatile investment. Policy-makers may thus face a long-run trade-off between the level and the volatility of investment. We also find that increases in risk defined in terms of mean-preserving spreads may lead to lower investment.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Sumru Altug, Fanny S. Demers, Michel Demers,