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Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty

Author

Listed:
  • Alan Carruth

  • Andrew Dickerson

  • Andrew Henley

Abstract

This paper focuses on the determinants of aggregate investment spending in the UK, for the industrial and commercial company (ICC) sector. Important focal points of our analysis are the role for real profits and the impact of irreversibility and uncertainty in determining aggregate investment spending. Early work on manufacturing investment by Bean (1981a) developed a data-based dynamic specification of considerable complexity. We use multivariate cointegration techniques to discover a parsimonious dynamic model, which can explain the 1980s and early 1990s investment experience of the ICC sector. Our results show that a model based on investment and output alone does not cointegrate, and a short run dynamic model of these variables suffers from heteroscedasticity. This may be consistent with the idea that increased (uncontrolled for) uncertainty has led to increased volatility in investment. Investigation of a more general model indicates that real profits can enhance the explanation of investment spending, and that a potential proxy for uncertainty is the real price of gold.

Suggested Citation

  • Alan Carruth & Andrew Dickerson & Andrew Henley, 1997. "Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty," Studies in Economics 9704, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:9704
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    Cited by:

    1. Dey Shubhasis, 2017. "Sources of Uncertainty and the Indian Economy," Working papers 253, Indian Institute of Management Kozhikode.
    2. Alan Carruth & Andy Dickerson & Andrew Henley, 2000. "What do We Know About Investment Under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-154, April.
    3. Joseph P. Byrne & E. Philip Davis, 2005. "Investment and Uncertainty in the G7," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 1-32, April.
    4. Simon Price, 2004. "UK investment and the return to equity: Q redux," Money Macro and Finance (MMF) Research Group Conference 2004 87, Money Macro and Finance Research Group.
    5. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2002. "The Effect of Uncertainty on UK Investment Authorisation: Pooled Estimators vs. Heterogeneous Estimators1," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-4, International Conferences on Panel Data.
    6. Panagiotidis, Theodore & Printzis, Panagiotis, 2020. "What is the investment loss due to uncertainty?," Global Finance Journal, Elsevier, vol. 45(C).
    7. Nesrine Dardouri & Abdelkader Aguir & Ramzi Farhani & Mounir Smida, 2023. "Revisiting the Determinants of Investment- The Case of Tunisia," Post-Print hal-04101430, HAL.
    8. Ellis, Colin & Simon Price, 2003. "UK Business Investment: Long-Run Elasticities and Short-Run Dynamics," Royal Economic Society Annual Conference 2003 73, Royal Economic Society.
    9. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Staff Working Papers 01-16, Bank of Canada.
    10. Muyambiri, Brian & Chiwira, Oscar & Enowbi Batuo, Michael & Chiranga, Ngonidzashe, 2010. "The Causal Relationship between Private and Public Investment in Zimbabwe," MPRA Paper 26671, University Library of Munich, Germany.
    11. Colin Ellis & Simon Price, 2004. "UK Business Investment and the User Cost of Capital," Manchester School, University of Manchester, vol. 72(s1), pages 72-93, September.
    12. Mr. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 2006/152, International Monetary Fund.
    13. Vidya Sukumara Panicker & Sumit Mitra & Rajesh Srinivas Upadhyayula, 2018. "Ownership in Emerging Market Firms and International investments: Board independence and CEO duality as Moderators," Working papers 252, Indian Institute of Management Kozhikode.
    14. Wolassa L. Kumo, 2006. "Macroeconomic Uncertainty And Aggregate Private Investment In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 74(2), pages 190-204, June.
    15. Andrew Brigden & Paul Mizen, 2004. "Interactions between Money, Lending and Investment in the UK Private Non‐Financial Corporate Sector," Manchester School, University of Manchester, vol. 72(1), pages 72-99, January.
    16. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).

    More about this item

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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