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Why is Micro Evidenceon 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: 36
    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; equation; capital stock; equations; correlation; linear trend; statistics; functional form; standard errors; descriptive statistics; standard deviation; measure of uncertainty; cost of capital; capital accumulation; subsidiaries; lagrange multiplier test; kurtosis; time series; skewness; survey; samples; net capital; stock market; normal distributions; statistic; estimation of equation; basic descriptive statistics; cointegration; consistent estimator; linear time trend; linear time; instrumental variables; time series analysis; prediction; econometrics; constant term; autocorrelation; stock exchange; significance levels; finite sample; capital gain; deductions; dummy variables;

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    1. 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.
    2. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
    3. 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.
    4. Luigi Guiso & Giuseppe Parigi, 1999. "Investment And Demand Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 185-227, February.
    5. 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.
    6. 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.
    7. Domenico Lombardi & Stephen Bond, 2004. "To Buy or Not to Buy? Uncertainty, Irreversibility and Heterogeneous Investment Dynamics in Italian Company Data," IMF Working Papers 04/104, International Monetary Fund.
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