The Influence of Inflation on Real Capital Investment in the European Union
More details
Hide details
Publication date: 2005-12-31
GNPJE 2005;204(11-12):19-30
Inflation can produce a number of negative effects. These primarily include slower economic growth and decreased investment. The article examines the influence of inflation on real capital investments. The author ventures a hypothesis about a negative effect of inflation on investment. The main theoretical arguments in favor of such a hypothesis are the uncertainty provoked by inflation and the increased costs of business activity. The first part of the article reviews theories that describe the influence of inflation on investment. Part two presents the theoretical assumptions of the model. The last part is a presentation and discussion of the results of the empirical studies conducted. The constructed model scrutinizes the rate of investment in real capital in 15 European Union countries in 1972-2001. The Error Correction Model (ECM), fit for statistical purposes, makes it possible to demonstrate both long- and short-term effects. The conclusion is that the influence of inflation on investment is negative and long-term in nature. In the short term, inflation does not affect investment. As expected, the rate of GDP growth has a positive influence on the rate of investment. Moreover, due to reasons not considered in the model—such as the state of infrastructure, the quality and stability of law and the availability of other factors of production—the rate of investment varied considerably from one country to another. Overall, inflation has a strong influence on investment, providing a serious argument in favor of keeping price growth at a low level.
Journals System - logo
Scroll to top