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Macroeconomic uncertainty and private investment in developing countries - an empirical investigation

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  • Serven, Luis

Abstract

The impact of uncertainty on investment has attracted considerable attention in the analytical and empirical macroeconomic literature. In theory, however, uncertainty can affect investment through different channels, some of which operate in mutually opposing direction. So, the sigh of its overall effect is ambiguous and can be assessed only empirically. To thoroughly assess the impact of macroeconomic uncertainty on private investment, the author uses a large panel data set on developing countries. He draws a distinction between sample variability and uncertainty, constructs alternative measure of the volatility of innovations to five key macroeconomic variables (inflation, growth, the terms of trade, the real exchange rate, and the price of capital goods), and examines their association with aggregate private investment. He then adds these constructed measures to an empirical investment equation that is estimated using alternative panel data econometric methods, allowing for simultaneity, country-specific effects, and parameter heterogeneity across countries. The results underscore the robustness of the link between investment and uncertainty. Virtually all of the volatility measures in the paper show a strong negative association with investment ratios. In addition, the regression estimates indicate that uncertainty has an adverse direct impact on investment, over and above any indirect effect that might also be at work. This finding is particularly robust in the case of real exchange rate volatility, which invariably has a robust negative effect on investment, regardless of econometric specification.

Suggested Citation

  • Serven, Luis, 1998. "Macroeconomic uncertainty and private investment in developing countries - an empirical investigation," Policy Research Working Paper Series 2035, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2035
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mario Quagliariello, 2009. "Macroeconomic uncertainty and banks' lending decisions: the case of Italy," Applied Economics, Taylor & Francis Journals, vol. 41(3), pages 323-336.
    2. Dehn, Jan, 2000. "The effects on growth of commodity price uncertainty and shocks," Policy Research Working Paper Series 2455, The World Bank.
    3. Hjalmar Böhm & Michael Funke & Nikolaus A. Siegfried, 1999. "Discovering the Link between Uncertainty and Investment - Microeconometric Evidence from Germany," Quantitative Macroeconomics Working Papers 19906, Hamburg University, Department of Economics.
    4. Bianca Clausen, 2008. "Real Effective Exchange Rate Uncertainty, Threshold Effects, and Aggregate Investment – Evidence from Latin American Countries," IWP Discussion Paper Series 02/2008, Institute for Economic Policy, Cologne, Germany.
    5. Joshua Aizenman & Brian Pinto, 2004. "Managing Volatility and Crises: A Practitioner's Guide Overview," NBER Working Papers 10602, National Bureau of Economic Research, Inc.
    6. Demir, Firat, 2007. "Private Investment and Cash Flow Relationship Revisited: Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets," MPRA Paper 3081, University Library of Munich, Germany.
    7. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    8. Demir, Firat, 2007. "Private Investment, Portfolio Choice and Financialization of Real Sectors in Emerging Markets," MPRA Paper 3835, University Library of Munich, Germany, revised Jul 2007.
    9. Demir, Firat, 2006. "Volatility of short term capital flows, financial anarchy and private investment in emerging markets," MPRA Paper 3080, University Library of Munich, Germany, revised May 2007.
    10. Demir, Firat, 2006. "Volatility of short term capital flows and socio-political instability in Argentina, Mexico and Turkey," MPRA Paper 1943, University Library of Munich, Germany.
    11. Fernández-Méndez, Laura & García-Canal, Esteban & Guillén, Mauro F., 2015. "Legal Family and Infrastructure Voids as Drivers of Regulated Physical Infrastructure Firms' Exposure to Governmental Discretion," Journal of International Management, Elsevier, vol. 21(2), pages 135-149.
    12. Lutfi Erden & Randall G. Holcombe, 2006. "The Linkage Between Public and Private Investment: A Co-integration Analysis of a Panel of Developing Countries," Eastern Economic Journal, Eastern Economic Association, vol. 32(3), pages 479-492, Summer.

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