Business Finance in Less Developed Capital Markets

By Klaus P. Fischer; George J. Papaioannou | Go to book overview

an investment model has been formulated that incorporates the effects of inflation- induced uncertainty on the business forecasts of risk-averse investors. The empirical analysis with Peruvian data confirmed the theoretical proposition that firms reduce their real capital formation if the inflation variability rises. The empirical investigation also showed a close relationship between the level and the variability of inflation. It can thus be concluded that financial liberalizations has to be accompanied by measures to reduce inflation if private real capital formation is to be stimulated effectively. Otherwise, an increased credit supply will not lead to more long-term investments but rather will be used to finance consumption and short- term speculative investments.


NOTES
1.
For an overview of the theoretical and empirical literature, see Fischer ( 1982), Fry ( 1982). Gupta ( 1984), and World Bank ( 1989).
2.
See Logue and Willet ( 1976); Blejer ( 1979); Fischer ( 1981); Bulkey ( 1984).
3.
Halloran and Lanser ( 1983) showed that even inflation-adjusted accounting is not free from inflation biases due to the inherently uncertain nature of inflation forecasts.
4.
In developing countries household firms are of considerable quantitative importance in agriculture and the manufacturing sector. Firms with fewer than five employees account for 80 percent or more of all firms in the manufacturing sector ( Bruch 1983, p. 4.)
5.
For an overview and an empirical comparison of various investment models, see Kopcke ( 1985).
6.
With respect to the dependent variable, gross investment is preferred to net investment, since the latter cannot be explained without considering depreciation losses. Firms generally plan net additions to the existing capital stock and the replacement of worn-out parts simultaneously ( Heil 1985).
7.
Further lags did not prove to be significant, nor did they improve the coefficient of determination adjusted for the degrees of freedom.

DATA SOURCES

Banco Central de Reserva del Perú (BCRP). Cuentas Nacionales del Perú: 1960- 1974. Lima.

-----. Memoria. Various issues.

-----. "Tasas de Interes en Moneda Nacional." Unpublished paper, Lima.

Instituto Nacional de Estadistica (INE). Cuentas Nacionales del Perú. Various issues.


REFERENCES

Blejer Mario I. ( 1979). "The Demand for Money and the Variability of the Rate of Inflation: Some Empirical Results." International Economic Review 20, no. 2: 545-549.

Bruch Mathias, ( 1983). Kleinbetriebe und Industrialisierungspolitik in Entwicklungsländern. Kieler Studien, no. 182. Tübingen: Mohr.

Bulkey George. ( 1984). "Does Inflation Uncertainty Increase with the Level of Inflation?" European Economic Review 25: 213-221.

-260-

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