Eden, Maya
Inflation and Indivisible Investment in Developing Economies Eden, Maya [electronic resource] / Eden, Maya - Washington, D.C., The World Bank, 2014 - 1 online resource (35 p.) - Policy research working papers. World Bank e-Library. .
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.
10.1596/1813-9450-6972
Access to Finance
Debt Markets
Developing Economies
Economic Theory & Research
Finance and Financial Sector Development
Indivisible Investment
Inflation
Investment & Investment Climate
Investment Decisions
Macroeconomics and Economic Growth
Money-Intensive Investment
Non Bank Financial Institutions
Inflation and Indivisible Investment in Developing Economies Eden, Maya [electronic resource] / Eden, Maya - Washington, D.C., The World Bank, 2014 - 1 online resource (35 p.) - Policy research working papers. World Bank e-Library. .
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.
10.1596/1813-9450-6972
Access to Finance
Debt Markets
Developing Economies
Economic Theory & Research
Finance and Financial Sector Development
Indivisible Investment
Inflation
Investment & Investment Climate
Investment Decisions
Macroeconomics and Economic Growth
Money-Intensive Investment
Non Bank Financial Institutions