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The impact of uncertainty on investment plans


Author Info

  • Paul Butzen

    (National Bank of Belgium, Research Department)

  • Catherine Fuss

    (National Bank of Belgium, Research Department)

  • Philip Vermeulen

    (European Central Bank)


In this paper we investigate how demand and output price uncertainty affect investment plans of Belgian manufacturing firms. We obtain time-varying uncertainty measures at the firm and industry level from the Belgian monthly business cycle survey and investment plans from the half-yearly investment survey. Using investment plans instead of realised investment data, e.g. annual accounts data, is, from an informative point of view, superior since it is more likely to reveal the features of the decision formation process and, therefore, it is most closely related to economic theory. Business investment is normally planned well in advance, because it involves time and costs to implement, and theory describes the behaviour of firms at the moment of their decision, which can be assumed to be fully captured in survey data. In order to find robust predictions we estimate three different specifications, each of which can be considered as a benchmark in the literature: two reduced form equations and a structural Euler equation. Our results show that uncertainty depresses investment. These results hold for industry- as well as for firmspecific demand uncertainty. Moreover, referring to Euler equation, uncertainty postpones investment today in favour of investment tomorrow. This effect is stronger for firms with more irreversible investment. Hence, our results seem to confirm to predictions of the real option theory.

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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 24.

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Length: 41 pages
Date of creation: May 2002
Date of revision:
Handle: RePEc:nbb:reswpp:200205-5

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Related research

Keywords: investment; uncertainty; irreversibility; real options; survey data;

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Cited by:
  1. von Kalckreuth, Ulf, 2000. "Exploring the role of uncertainty for corporate investment decisions in Germany," Discussion Paper Series 1: Economic Studies 2000,05, Deutsche Bundesbank, Research Centre.
  2. António Afonso & João Tovar Jalles, 2011. "Linking Investment and Fiscal Policies," Working Papers Department of Economics 2011/16, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  3. Pablo Acosta & Andrés Loza, 2005. "Short and long run determinants of private investment in Argentina," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 389-406, November.


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