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Economic disasters and aggregate investment

Author

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  • Bruno Ćorić

    (University of Split
    CERGE-EI Foundation)

  • Vladimir Šimić

    (University of Split
    CERGE-EI Foundation)

Abstract

The 2007–2008 global financial crisis has spurred an increasing interest for investigating the financial and macroeconomic effects of the rare but extremely large economic crises, the so-called economic disasters. Current literature on the topic shows that probability of economic disasters plays an important role in the long-run effect of output volatility on investment. This paper investigates the long-run relationship between economic disasters and aggregate investment. We analyze the data for a large number of developing and developed countries after the World War II. The conducted panel data analysis indicates a negative effect of the probability of economic disasters on aggregate investment. Our results contribute to the recent literature on economic disasters by providing empirical support for the hypothesis that probability of infrequent but extremely large economic crises has a negative long-run effect on investment. We also find that the effect of ‘normal’ output volatility on aggregate investment is relatively small.

Suggested Citation

  • Bruno Ćorić & Vladimir Šimić, 2021. "Economic disasters and aggregate investment," Empirical Economics, Springer, vol. 61(6), pages 3087-3124, December.
  • Handle: RePEc:spr:empeco:v:61:y:2021:i:6:d:10.1007_s00181-020-02010-2
    DOI: 10.1007/s00181-020-02010-2
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    Keywords

    Aggregate investment; Economic disasters; Output volatility; Empirical analysis;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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