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Expectation Errors, Uncertainty And Economic Activity

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  • Yavuz Arslan
  • Aslihan Atabek
  • Timur Hulagu
  • Saygin Sahinoz

Abstract

The aim of this study is to analyze the relationship between uncertainty and economic activity. For this purpose, we use a confidential firm level panel data set (Business Tendency Survey) from Turkey to form three uncertainty measures, namely total, idiosyncratic and aggregate uncertainty. In particular, we construct expectation errors of firms by comparing their survey responses about expectations and realizations on their production volume. Our results reveal countercyclical relationships between our uncertainty measures and economic activity. We further show that a one standard deviation increase in aggregate uncertainty is followed by a 0 : 5 percent decline in year-on-year change of industrial production on impact. The prolonged effect reaches more than 4 : 7 percent in a year for any of these three measures. In addition to the macroeconomic implications of uncertainty, we exploit the panel dimension of our data set to investigate the effects of firm specific uncertainty on that firm's investment decisions. Ordered probit estimation results show that if a firm makes more expectation errors -faces more uncertainty- it is more likely to defer investment plans even after controlling the aggregate uncertainty.

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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1117.

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Date of creation: 2011
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Handle: RePEc:tcb:wpaper:1117

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Related research

Keywords: Uncertainty; Qualitative Survey Data; Business Cycles; Investment;

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Cited by:
  1. Scott R. Baker & Nicholas Bloom, 2013. "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments," NBER Working Papers 19475, National Bureau of Economic Research, Inc.
  2. Stephanie Denis & Prakash Kannan, 2013. "The Impact of Uncertainty Shocks on the UK Economy," IMF Working Papers 13/66, International Monetary Fund.

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