DOES PRICE UNCERTAINTY REALLY REDUCE PRIVATE INVESTMENT - A SMALL MODEL APPLIED TO CHILE

The recent literature emphasizes the negative impact of price uncertai nty on private investment as a result of a higher risk premium - the p rice to wait. This paper argues that the uncertainty concerning the co st of capital should be compared with uncertainty in the price of outp ut. Using a simple analytical model, we conclude that the efficiency o f policies aimed to reduce the price of capital, or the basic accelera tor between investment and output growth, may be enhanced if (1) the v olatility of the output price is greater than the volatility of the co st of capital, and (2) there is a positive correlation between changes in the output and capital prices. In both cases, private investment w ill be more responsive because firms will minimize profit fluctuations . In the second part of the paper, the model is applied to the case of Chile over the 1980-90 period. This country has earned the reputation of being the 'success story' of structural adjustment and has achieve d fairly stable growth in the past eight years.