Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89093
Authors: 
Cavallo, Eduardo
Galindo, Arturo
Izquierdo, Alejandro
Leon, John Jairo
Year of Publication: 
2010
Series/Report no.: 
IDB Working Paper Series IDB-WP-208
Abstract: 
This paper estimates the impact of relative price volatility on sector-level investment allocation using a panel of 65 countries with data for 26 manufacturing industries over the period 1985-2003. Results indicate that volatility distorts efficient investment allocation in that investment is not necessarily devoted to relatively more productive sectors, especially in emerging market economies that are highly exposed and may lack the necessary institutions to deal with it successfully. This is evidence in support of theories suggesting that relative price volatility provides incentives for entrepreneurs to adopt more “malleable” but less productive production technologies, enabling them to accommodate more easily abrupt and frequent changes in relative prices, but at the cost of using less productive technologies.
Subjects: 
Sector-level TFP
Relative price volatility
Investment allocation
Financial crises
Emerging markets
Malleable technologies
JEL: 
D24
E22
O31
L60
Document Type: 
Working Paper

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