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Investment and Uncertainty in the G7

  • Professor E. Philip Davis

    ()

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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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
Contact details of provider: Postal: 2 Dean Trench Street Smith Square London SW1P 3HE
Web page: http://niesr.ac.uk

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  1. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  2. 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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  8. 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.
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  13. Goldberg, L.S. & Campa, J., 1993. "Investment in Manufacturing, Exchange-Rate and External Exposure," Working Papers 93-18, C.V. Starr Center for Applied Economics, New York University.
  14. Joao Ejarque & Russell Cooper, 2000. "Exhuming Q: Market Power Versus Capital Market Imperfections," Computing in Economics and Finance 2000 316, Society for Computational Economics.
  15. 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.
  16. Mordecai Kurz & Maurizio Motolese, . "Endogenous Uncertainty and Market Volatility," Working Papers 99005, Stanford University, Department of Economics.
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  18. Serven, Luis, 2002. "Real exchange rate uncertainty and private investment in developing countries," Policy Research Working Paper Series 2823, The World Bank.
  19. Ferderer, J Peter, 1993. "The Impact of Uncertainty on Aggregate Investment Spending: An Empirical Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 30-48, February.
  20. 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.
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