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Investment and Uncertainty in the G7

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  • Professor E. Philip Davis

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Abstract

In this paper we assess the impact of a comprehensive range of macroeconomic and financial measures of uncertainty on business investment in the major industrial countries using Pooled Mean Group Panel Estimation. We discover a significant negative long run effect from both nominal and real exchange rate volatility using a GARCH (1,1) approach on aggregate investment for the G7. This is also found in poolable subgroups including all four larger European countries. Results for an adverse impact of uncertainty on investment are also found for volatility of long rates in recent years but not for inflation, share prices and industrial production. The results imply that to the extent that EMU favours lower exchange rate and long interest rate volatility, it will also be beneficial to investment.

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Bibliographic Info

Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 144.

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Date of creation: Jul 2002
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Handle: RePEc:nsr:niesrd:144

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  1. Darby, Julia & Hughes Hallett, Andrew & Ireland, Jonathan & Piscitelli, Laura, 1998. "The Impact of Exchange Rate Uncertainty on the Level of Investment," CEPR Discussion Papers 1896, C.E.P.R. Discussion Papers.
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  13. Temple, Paul & Urga, Giovanni & Driver, Ciaran, 2001. "The Influence of Uncertainty on Investment in the UK: A Macro or Micro Phenomenon?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(4), pages 361-82, September.
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  17. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  18. M Pesaran & Yongcheol Shin & Ron P Smith, 2004. "Pooled mean group estimation of dynamic heterogeneous panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
  19. Joao Ejarque & Russell Cooper, 2000. "Exhuming Q: Market Power Versus Capital Market Imperfections," Computing in Economics and Finance 2000 316, Society for Computational Economics.
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