Investment Choice and Inflation Uncertainty

This paper investigates the relationship between inflation uncertainty and the investmentdecisions of small, micro…finance-funded …firms in the Dominican Republic. An extensive literature documents the array of opposing factors linking inflation uncertainty and investment;ultimately this relationship is theoretically ambiguous. Using loan-level panel data from microfi…nance borrowers in the Dominican Republic, I …find that periods of increased inflationuncertainty were associated with substantially lower investments in …fixed assets and reducedbusiness growth. This …finding is robust to specifi…cations controlling for other forms of systemicrisk and aggregate economic activity, suggesting inflation uncertainty creates potentially largedistortions to the investment decisions of poor entrepreneurs.[...]