Abstract
Empirical work on uncertainty and investment generally focuses on one country or one indicator of uncertainty. We extend the literature by assessing the impact of a comprehensive range of potential sources of uncertainty on aggregate business investment across the G7 using Pooled Mean Group Estimation (PMGE) and GARCH methods to model uncertainty. A significant negative long-run effect from exchange rate volatility is found for the G7 and in poolable subgroups including all four larger EU countries. Volatility of long-term interest rates has additionally influenced investment in recent years. For most estimates, a one standard deviation rise in conditional volatility leads to a 2-4 per cent fall in investment although some samples give greater declines. The results suggest inter alia that EMU is beneficial to aggregate investment.
| Original language | English |
|---|---|
| Pages (from-to) | 1-32 |
| Number of pages | 32 |
| Journal | Review of World Economics |
| Volume | 141 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 30 Apr 2005 |
Funding
Remark: The project was undertaken while both authors were at the National Institute of Economic and Social Research. The authors wish to thank Paul Ashworth, Ray Barrell, Andy Blake, Stephen Hall, DeAnne Julius, Campbell Leith, Nigel Pain, Simon Price, Martin Weale and other seminar participants at NIESR and Warwick University for helpful suggestions. This research was financed by ESRC project L138250122, Fluctuations and Long-Term Prosperity: A Study of UK and International Economies. Please address correspondence to E. Philip Davis, Brunel University, Uxbridge, Middlesex, UB8 3PH and NIESR; e-mail: e philip [email protected]
Keywords
- exchange rates
- investment
- nonstationary panel estimation
- uncertainty