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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
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Web page: http://niesr.ac.uk

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  1. 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.
  2. Russell Cooper & Joao Ejarque, 2001. "Exhuming Q: market power capital market imperfections," Working Papers 611, Federal Reserve Bank of Minneapolis.
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  4. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  5. Joao Ejarque & Russell Cooper, 2000. "Exhuming Q: Market Power Versus Capital Market Imperfections," Computing in Economics and Finance 2000 316, Society for Computational Economics.
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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.
  9. Kwanho Shin & Jaewoo Lee, 2000. "The Role of a Variable Input in the Relationship between Investment and Uncertainty," American Economic Review, American Economic Association, vol. 90(3), pages 667-680, June.
  10. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. " What Do We Know about Investment under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-53, April.
  11. Dr Martin Weale, 1999. "The Forecasting Performance of the OECD Composite Leading Indicators for France, Germany, Italy and," NIESR Discussion Papers 187, National Institute of Economic and Social Research.
  12. Yongcheol Shin & Ron P Smith & Mohammad Hashem Pesaran, 1998. "Pooled Mean Group Estimation of Dynamic Heterogeneous Panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
  13. 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.
  14. Mordecai Kurz & Maurizio Motolese, 1999. "Endogenous Uncertainty and Market Volatility," Working Papers 1999.27, Fondazione Eni Enrico Mattei.
  15. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages C55-67, March.
  16. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  17. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  18. Serven, Luis, 2002. "Real exchange rate uncertainty and private investment in developing countries," Policy Research Working Paper Series 2823, The World Bank.
  19. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
  20. Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-15, May.
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