Inflation and Indivisible Investment in Developing Economies
In countries with limited access to finance, firms accumulate retained earnings to finance indivisible investment projects. McKinnon (1973) illustrates that when cash is used as a primary store of value, inflation may discourage investment as it in...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank Group, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2014/07/19877601/inflation-indivisible-investment-developing-economies http://hdl.handle.net/10986/19353 |
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okr-10986-193532021-04-23T14:03:51Z Inflation and Indivisible Investment in Developing Economies Eden, Maya Nguyen, Ha ACCESS TO CREDIT ACCESS TO SAVING AFFILIATED ORGANIZATIONS ANNUAL SALES CAPITAL INVESTMENT CAPITAL STOCK CAPITAL STOCKS CASH FLOW CASH RESERVES CASH SURPLUS CENTRAL BANK COST OF CAPITAL CREDIT LINE CREDIT MARKET DECISION MAKING DECLINE IN INVESTMENT DEVELOPING COUNTRIES DEVELOPMENT POLICY DISCOUNT RATE DIVIDENDS DUMMY VARIABLE DUMMY VARIABLES ECONOMIC ACTIVITIES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC PERFORMANCE EQUIPMENT EXTERNAL FINANCE FINANCIAL INSTITUTION FORMAL ANALYSIS FUTURE CASH FLOWS GDP GDP DEFLATOR HOLDING HOUSEHOLDS HUMAN CAPITAL ID INEQUALITY INFLATION INFLATION RATE INFLATION RATES INTEREST RATE INTERNAL FINANCING INTERNATIONAL BANK INVESTING INVESTMENT ACTIVITIES INVESTMENT CHOICE INVESTMENT DECISION INVESTMENT DECISIONS INVESTMENT OPPORTUNITIES INVESTMENT PROJECTS INVESTMENT RATES LACK OF ACCESS LEVEL OF INFLATION LIMITED ACCESS LIMITED ACCESS TO FINANCE LOCAL CURRENCY MACROECONOMIC CONDITION MACROECONOMIC CONDITIONS MACROECONOMICS MARGINAL PRODUCT MICRO DATA NOMINAL VALUE POLITICAL ECONOMY PRODUCTION FUNCTION RATE OF RETURN RATES OF INFLATION RATES OF RETURN REAL INTEREST REAL INTEREST RATE RETAINED EARNINGS RETURN ON INVESTMENT RETURNS SAVINGS SAVINGS ACCOUNTS SELF-FINANCING TAX TOTAL OUTPUT WEALTH In countries with limited access to finance, firms accumulate retained earnings to finance indivisible investment projects. McKinnon (1973) illustrates that when cash is used as a primary store of value, inflation may discourage investment as it increases the cost of accumulating retained earnings. This paper formalizes this argument in a dynamic framework and provides a simple calibration of the model that suggests sizable effects of inflation on investment. The mechanism is particularly relevant for small firms, as firms with lower cash flows must accumulate retained earnings for longer periods of time to meet the price of indivisible investment goods. Consistent with the model, empirical evidence suggests that inflation disproportionately reduces investment in small firms. 2014-08-15T14:56:16Z 2014-08-15T14:56:16Z 2014-07 http://documents.worldbank.org/curated/en/2014/07/19877601/inflation-indivisible-investment-developing-economies http://hdl.handle.net/10986/19353 English en_US Policy Research Working Paper;No. 6972 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Group, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ACCESS TO CREDIT ACCESS TO SAVING AFFILIATED ORGANIZATIONS ANNUAL SALES CAPITAL INVESTMENT CAPITAL STOCK CAPITAL STOCKS CASH FLOW CASH RESERVES CASH SURPLUS CENTRAL BANK COST OF CAPITAL CREDIT LINE CREDIT MARKET DECISION MAKING DECLINE IN INVESTMENT DEVELOPING COUNTRIES DEVELOPMENT POLICY DISCOUNT RATE DIVIDENDS DUMMY VARIABLE DUMMY VARIABLES ECONOMIC ACTIVITIES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC PERFORMANCE EQUIPMENT EXTERNAL FINANCE FINANCIAL INSTITUTION FORMAL ANALYSIS FUTURE CASH FLOWS GDP GDP DEFLATOR HOLDING HOUSEHOLDS HUMAN CAPITAL ID INEQUALITY INFLATION INFLATION RATE INFLATION RATES INTEREST RATE INTERNAL FINANCING INTERNATIONAL BANK INVESTING INVESTMENT ACTIVITIES INVESTMENT CHOICE INVESTMENT DECISION INVESTMENT DECISIONS INVESTMENT OPPORTUNITIES INVESTMENT PROJECTS INVESTMENT RATES LACK OF ACCESS LEVEL OF INFLATION LIMITED ACCESS LIMITED ACCESS TO FINANCE LOCAL CURRENCY MACROECONOMIC CONDITION MACROECONOMIC CONDITIONS MACROECONOMICS MARGINAL PRODUCT MICRO DATA NOMINAL VALUE POLITICAL ECONOMY PRODUCTION FUNCTION RATE OF RETURN RATES OF INFLATION RATES OF RETURN REAL INTEREST REAL INTEREST RATE RETAINED EARNINGS RETURN ON INVESTMENT RETURNS SAVINGS SAVINGS ACCOUNTS SELF-FINANCING TAX TOTAL OUTPUT WEALTH |
| spellingShingle |
ACCESS TO CREDIT ACCESS TO SAVING AFFILIATED ORGANIZATIONS ANNUAL SALES CAPITAL INVESTMENT CAPITAL STOCK CAPITAL STOCKS CASH FLOW CASH RESERVES CASH SURPLUS CENTRAL BANK COST OF CAPITAL CREDIT LINE CREDIT MARKET DECISION MAKING DECLINE IN INVESTMENT DEVELOPING COUNTRIES DEVELOPMENT POLICY DISCOUNT RATE DIVIDENDS DUMMY VARIABLE DUMMY VARIABLES ECONOMIC ACTIVITIES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC PERFORMANCE EQUIPMENT EXTERNAL FINANCE FINANCIAL INSTITUTION FORMAL ANALYSIS FUTURE CASH FLOWS GDP GDP DEFLATOR HOLDING HOUSEHOLDS HUMAN CAPITAL ID INEQUALITY INFLATION INFLATION RATE INFLATION RATES INTEREST RATE INTERNAL FINANCING INTERNATIONAL BANK INVESTING INVESTMENT ACTIVITIES INVESTMENT CHOICE INVESTMENT DECISION INVESTMENT DECISIONS INVESTMENT OPPORTUNITIES INVESTMENT PROJECTS INVESTMENT RATES LACK OF ACCESS LEVEL OF INFLATION LIMITED ACCESS LIMITED ACCESS TO FINANCE LOCAL CURRENCY MACROECONOMIC CONDITION MACROECONOMIC CONDITIONS MACROECONOMICS MARGINAL PRODUCT MICRO DATA NOMINAL VALUE POLITICAL ECONOMY PRODUCTION FUNCTION RATE OF RETURN RATES OF INFLATION RATES OF RETURN REAL INTEREST REAL INTEREST RATE RETAINED EARNINGS RETURN ON INVESTMENT RETURNS SAVINGS SAVINGS ACCOUNTS SELF-FINANCING TAX TOTAL OUTPUT WEALTH Eden, Maya Nguyen, Ha Inflation and Indivisible Investment in Developing Economies |
| relation |
Policy Research Working Paper;No. 6972 |
| description |
In countries with limited access to
finance, firms accumulate retained earnings to finance
indivisible investment projects. McKinnon (1973) illustrates
that when cash is used as a primary store of value,
inflation may discourage investment as it increases the cost
of accumulating retained earnings. This paper formalizes
this argument in a dynamic framework and provides a simple
calibration of the model that suggests sizable effects of
inflation on investment. The mechanism is particularly
relevant for small firms, as firms with lower cash flows
must accumulate retained earnings for longer periods of time
to meet the price of indivisible investment goods.
Consistent with the model, empirical evidence suggests that
inflation disproportionately reduces investment in small firms. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Eden, Maya Nguyen, Ha |
| author_facet |
Eden, Maya Nguyen, Ha |
| author_sort |
Eden, Maya |
| title |
Inflation and Indivisible Investment in Developing Economies |
| title_short |
Inflation and Indivisible Investment in Developing Economies |
| title_full |
Inflation and Indivisible Investment in Developing Economies |
| title_fullStr |
Inflation and Indivisible Investment in Developing Economies |
| title_full_unstemmed |
Inflation and Indivisible Investment in Developing Economies |
| title_sort |
inflation and indivisible investment in developing economies |
| publisher |
World Bank Group, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2014/07/19877601/inflation-indivisible-investment-developing-economies http://hdl.handle.net/10986/19353 |
| _version_ |
1764443808856014848 |