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Macroeconomic uncertainty and private investment in developing countries - an empirical investigation

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Author Info
Serven, Luis

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Abstract

The impact of uncertainty on investment has attracted considerable attention in the analytical and empirical macroeconomic literature. In theory, however, uncertainty can affect investment through different channels, some of which operate in mutually opposing direction. So, the sigh of its overall effect is ambiguous and can be assessed only empirically. To thoroughly assess the impact of macroeconomic uncertainty on private investment, the author uses a large panel data set on developing countries. He draws a distinction between sample variability and uncertainty, constructs alternative measure of the volatility of innovations to five key macroeconomic variables (inflation, growth, the terms of trade, the real exchange rate, and the price of capital goods), and examines their association with aggregate private investment. He then adds these constructed measures to an empirical investment equation that is estimated using alternative panel data econometric methods, allowing for simultaneity, country-specific effects, and parameter heterogeneity across countries. The results underscore the robustness of the link between investment and uncertainty. Virtually all of the volatility measures in the paper show a strong negative association with investment ratios. In addition, the regression estimates indicate that uncertainty has an adverse direct impact on investment, over and above any indirect effect that might also be at work. This finding is particularly robust in the case of real exchange rate volatility, which invariably has a robust negative effect on investment, regardless of econometric specification.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2035.

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Date of creation: 31 Dec 1998
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Handle: RePEc:wbk:wbrwps:2035

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Keywords: International Terrorism&Counterterrorism; Economic Theory&Research; Environmental Economics&Policies; Fiscal&Monetary Policy; Payment Systems&Infrastructure; ICT Policy and Strategies; International Terrorism&Counterterrorism; Macroeconomic Management; Economic Theory&Research; Environmental Economics&Policies;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Demir, Firat, 2007. "Volatility of short term capital flows and socio-political instability in developing countries: A review," MPRA Paper 1943, University Library of Munich, Germany, revised Jan 2008. [Downloadable!]
  2. Hjalmar Boehm & Michael Funke & Nikolaus A. Siegfried, 2000. "Discovering the Link Between Uncertainty and Investment - Microeconometric Evidence from Germany," Econometric Society World Congress 2000 Contributed Papers 0112, Econometric Society. [Downloadable!]
    Other versions:
  3. Mario Quagliariello, 2006. "Macroeconomics Uncertainty and Banks' Lending Decisions: The Case of Italy," Discussion Papers 06/02, Department of Economics, University of York. [Downloadable!]
    Other versions:
  4. Hjalmar Böhm & Michael Funke & Nikolaus A. Siegfried, 2000. "Investigating the Link between Uncertainty and Investment - Microeconometric Evidence from Germany," Quantitative Macroeconomics Working Papers 20008, Hamburg University, Department of Economics. [Downloadable!]
  5. Demir, Firat, 2007. "Private Investment and Cash Flow Relationship Revisited: Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets," MPRA Paper 3081, University Library of Munich, Germany. [Downloadable!]
  6. Francisco A. Gallego & Klaus Schmidt-Hebbel & Luis Servén, 2004. "General Equilibrium Dynamics of External Shocks and Policy Changes in Chile," Working Papers Central Bank of Chile 271, Central Bank of Chile. [Downloadable!]
  7. Dehn, Jan, 2000. "The effects on growth of commodity price uncertainty and shocks," Policy Research Working Paper Series 2455, The World Bank. [Downloadable!]
  8. Calderon, Cesar & Kubota, Megumi, 2009. "Does higher openness cause more real exchange rate volatility ?," Policy Research Working Paper Series 4896, The World Bank. [Downloadable!]
  9. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Bianca Clausen, 2008. "Real Effective Exchange Rate Uncertainty, Threshold Effects, and Aggregate Investment – Evidence from Latin American Countries," IWP Discussion Paper Series 02/2008, Institute for Economic Policy, Cologne, Germany. [Downloadable!]
  11. Demir, Firat, 2008. "Financial Liberalization, Private Investment and Portfolio Choice: Financialization of Real Sectors in Emerging Markets," MPRA Paper 3835, University Library of Munich, Germany, revised 01 Apr 2008. [Downloadable!]
    Other versions:
  12. Joshua Aizenman & Brian Pinto, 2004. "Managing Volatility and Crises: A Practitioner's Guide Overview," NBER Working Papers 10602, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Demir, Firat, 2006. "Volatility of short term capital flows, financial anarchy and private investment in emerging markets," MPRA Paper 3080, University Library of Munich, Germany, revised May 2007. [Downloadable!]
  14. Lutfi Erden & Randall G. Holcombe, 2006. "The Linkage Between Public and Private Investment: A Co-integration Analysis of a Panel of Developing Countries," Eastern Economic Journal, Eastern Economic Association, vol. 32(3), pages 479-492, Summer. [Downloadable!]
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