IDEAS home Printed from
   My bibliography  Save this article

Assessing the impact of uncertainty on consumption and investment


  • Narcissa Balta
  • Ismael Valdes Fernandez
  • Eric Ruscher


Economic theory suggests that uncertainty has a detrimental effect on economic activity by giving agents the incentive to postpone investment, consumption and employment decisions until uncertainty is resolved, and by pushing up the cost of capital through increased risk premia. To test the impact of uncertainty on activity in the euro area, indicators of uncertainty for industry and consumers are derived from business and consumer surveys (BCS). The indicators measure the divergence of business and consumer expectations about the economy and their finances. The underlying assumption is that the more economic agents disagree in their expectations, the higher the uncertainty in the economy. The impact of uncertainty is then estimated using fully specified investment and consumption models. To benchmark the results of the estimation against alternative measures of uncertainty, the BCS indicators are compared with a widely used indicator of Policy Uncertainty. A key finding of the analysis is that uncertainty has a significant negative impact on both investment and consumption. The effect of uncertainty on economic activity also appears to have increased since the crisis. The econometric analysis indicates that uncertainty is currently hindering economic activity in the euro area. Although uncertainty in financial markets has abated significantly in recent months on the back of decisive policy interventions, other sources of macroeconomic uncertainty remain high. The policy uncertainty and BCS indicators are still unusually high and have so far shown only limited signs of improvement.

Suggested Citation

  • Narcissa Balta & Ismael Valdes Fernandez & Eric Ruscher, 2013. "Assessing the impact of uncertainty on consumption and investment," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 12(2), pages 7-16, June.
  • Handle: RePEc:euf:qreuro:0122-01

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    2. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-1147, December.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Peter Claeys & Borek Vasicek, 2017. "Transmission of Uncertainty Shocks: Learning from Heterogeneous Responses on a Panel of EU Countries," Working Papers 2017/13, Czech National Bank, Research Department.
    2. repec:eee:intfor:v:34:y:2018:i:2:p:355-365 is not listed on IDEAS

    More about this item


    economic uncertainty; consumption; investment;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:euf:qreuro:0122-01. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ECFIN INFO). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.