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Why Is Micro Evidence on the Effects of Uncertainty Not Replicated In Macro Data?

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  • Domenico Lombardi
  • Stephen Bond
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    Abstract

    This study investigates the relationship between uncertainty and investment using U.K. data at different levels of aggregation. Motivated by a comparative econometric analysis using a firm-level panel and aggregate time-series data, we analyze the implications of aggregating nonlinear microeconomic processes. Replicating firm-level evidence that uncertainty influences investment dynamics proves to be challenging. Even using perfectly consistent data sources, this requires both exact aggregation of the underlying micro equations, and controlling for the unobserved influences on investment that are commonly subsumed into time dummies in panel studies. These conditions are unlikely to be satisfied in most aggregate econometric studies.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/158.

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    Length: 174
    Date of creation: 01 Aug 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/158

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    Related research

    Keywords: Data analysis; Data collection; Economic models;

    This paper has been announced in the following NEP Reports:

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    1. Guiso, Luigi & Parigi, Giuseppe, 1996. "Investment and Demand Uncertainty," CEPR Discussion Papers 1497, C.E.P.R. Discussion Papers.
    2. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
    3. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
    4. Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
    5. Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-88, November.
    6. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
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