Macroeconomic uncertainty and private investment in Argentina, Mexico and Turkey

Empirica, 2004

There is a presumption in the literature that price or exchange rate uncertainty, or uncertainty in the monetary conditions underlying them, will have a negative effect on investment. Some argue that this negative effect will be extended by imperfect competition. However, models of ''irreversible'' investment show that the situation is more complicated than that. In these models, investment expenditures are affected by the scrapping price available on world markets and also by the opportunity cost of waiting rather than investing. The impact of uncertainty is therefore going to depend on the type of industry and hence on the industrial structure of the economy concerned. In addition, it may depend on the persistence of any price ''misalignments'' away from competitive equilibrium. In this paper, we put these theoretical predictions to the test. We estimate investment equations for 13 different industries using data for nine OECD countries over the period 1970-2000. We find that the impact of price uncertainty is negative or insignificant in all but one case whereas the impact of (nominal) exchange rate uncertainty is negative in only six cases, positive in four cases, and insignificant in three others. In addition, there are conflicting effects from the real exchange rate. The net effect depends on whether the source of the uncertainty is in domestic markets or in foreign markets.

Romanian journal of economic forecasting

From a theoretical point of view, uncertainty may have an impact on investment by different channels and in different directions. Thus, the sign of its overall effect is unknown and could be found only empirically from the historical data. This paper analyzes the relation between macroeconomic uncertainty and total investment in Romania over the period 2000-2008. As a source of uncertainty, it considers different measures of volatility in prices and exchange rate from autoregressive conditional heteroskedastic (GARCH) models. These measures are introduced as a linear and a quadratic term in the investment equation. The results prove a nonlinear effect of uncertainty on investment.

2013

Review of Development …, 2008

Using exchange rate uncertainty (ERU) and sociopolitical instability (SPI) as measures of macroeconomic imbalances and political disorder, respectively, we investigate the link between these two factors and private investment in Latin America. The analysis shows that while ERU and SPI negatively impact private investment jointly, the individual impact of ERU is much greater than that of SPI. Our results should prove useful both to policymakers and others interested in understanding the impact of uncertainty on private investment. Most importantly, macroeconomic policies that limit excess volatility in relative prices should lessen an economy's general level of investment risk leading to enhanced private investment. Further, though lesser in degree, institutional reforms that reduce social tensions and strengthen property rights should also stimulate private investment. Finally, structural reforms that combine these two are likely to foster a robust market for private investment thus contributing to an economy's growth potential. . For helpful comments, we would like to thank Charles Register and session participants of the Latin America Econometric Society Meetings, and LACEA Meetings. We would also like to thank an anonymous referee for constructive criticism that substantially improved the content and presentation of the paper. The usual disclaimer applies.

Uluslararası iktisadi ve idari incelemeler dergisi, 2019

Analysis of investment decisions is an important macroeconomic subject due to the role of fluctuations in investments on the economic performance. It is argued that investment models need to take this effect into account if uncertainty has an impact on investment. Therefore, the effects of uncertainty on investments have recently been analyzed in the theoretical and empirical literature. While developing economies face more uncertainty than industrial countries do, most empirical studies consider the uncertainty-investment relationship for developed counties. In this paper, we analyzed the effect of the macro economic uncertainties on private investment in a developing county: Poland. We constructed a generalized autoregressive conditional heteroskedasticity (GARCH) model to measure uncertainties. Then, we employed the bound testing procedure to cointegration analysis. Since our findings indicate a long-term relationship of the variables, we adopt an error correction model to capture the dynamic relationship. Our estimates imply that the real exchange rate, inflation and growth uncertainties effect private investments negatively in Poland. Therefore, we can conclude that macroeconomic stabilization is a necessary condition for the continuity of investments in Poland.

Oxford Bulletin of Economics and Statistics, 2004

This paper applies current theory concerning the impact of irreversibility of investment, in order to test for the impact of uncertainty on investment expenditure for a middle income country. The contribution of the paper is unique in two respects. First, it employs dynamic heterogeneous panel estimation techniques not previously applied to investment functions. Second, it explicitly tests for the impact of both sectoral and systemic uncertainty on investment expenditure. We …nd that both sectoral (as measured by output volatility around potential output) and systemic uncertainty impacts negatively on investment rates in a middle income country context. However, sectoral uncertainty is more important for resource intensive manufacturing sectors, while systemic uncertainty has a generalized impact across all manufacturing sectors. Standard proxies for expected return on capital stock, and the user cost of capital perform in accordance with theoretical priors.

Journal of Money, Credit and Banking, 2019

We examine how cross-firm and crosscountry heterogeneity shapes the responses of corporate investment in emerging markets to changes in U.S. monetary policy and financial-market volatility, the latter proxying for uncertainty. We find that in response to increases in U.S monetary policy rates or financial-market volatility, financially weaker firms reduce investment by more than financially strong firms. We also show that firms with stronger balance sheets delay investment voluntarily when faced with higher uncertainty. Finally, we find that stronger macroeconomic fundamentals (lower public debt or higher international reserves) help to buffer corporate investment from increases in U.S. monetary policy rates.

International Journal of Economics and Financial Issues, 2013

In spite of the progress made in economic performance over the years, the Ghanaian economy continues to be bedevilled by a host of constraints. Among these constraints are low levels of savings and investments which have raised serious concerns among economists and policy makers with respect to the sustainability of the achievements attained so far. This study attempts to investigate empirically the link between investments and uncertainty using dataset from Ghana covering the period 1975 to 2008. In the empirical analysis, the paper aims at separating ordinary variability from uncertainty by the construction of measures of uncertainty for some key macroeconomic indicators and using them to assess their impact on investment behaviour within an econometric framework including other acceptable determinants of investment. The Phillip-Hansen cointegration test confirms the existence of long-run equilibrium relationship between private investment, standard determinants of investment, and macroeconomic uncertainty. Result from the study shows that on the whole the investment-uncertainty link reveals a significant negative effect of all macroeconomic uncertainty indicator variables on private investment with the exception of real exchange rate volatility. The values for price of capital uncertainty, real GDP growth uncertainty, and terms of trade uncertainty are large in absolute terms. The regression result further reveals that private investment displays important inertia and shows slow adjustment process towards long-run equilibrium. Lastly, the summary measure of macroeconomic uncertainty which encompasses the first principal components of the conditional variances of the five macroeconomic variables shows a consistent indirect effect on private investment. Generally we found macroeconomic uncertainties to be more detrimental to private investment growth in the long-run relative to the short-run.

Applied Economics, 2009

During the 1980s and the 1990s, private investment in the Middle East and North Africa (MENA) has on average shown a decreasing or stagnant trend. This contrasts with the situation of the Asian economies, where private investment has always been more dynamic. In this paper, it is empirically shown for a panel of 39 developing economies-among which four MENA countries-that in addition to the traditional determinants of investment-such as the growth anticipations and the real interest rate-government policies explain MENA's low investment rate. Insufficient structural reforms-which have most of the time led to poor financial development and deficient trade openness-have been a crucial factor for the deficit in private capital formation. The economic uncertainties of the region have represented another factor of the firm's decisions not to invest. These uncertainties have consisted of the external debt burden and various measures of volatility.

Asian Economic and Financial Review, 2022

The study examines the link between firm-level investment and firm performance moderated by economic policy uncertainty in the manufacturing sector of Pakistan across the six years from 2015-2020. The System-GMM estimation has been employed to demonstrate the problem of endogeneity with dynamic linear and non-linear models. The study revealed that the moderating impact of economic policy uncertainty has negative and significant impact on investment (investment in tangible assets, investment in intangible assets, and financial leverage) and firm performance (Tobin's Q). Similarly, economic policy uncertainty regarding investment and firm performance (ROA) is negative and significant in investment in tangible assets, but positive and significant in financial leverage. Our findings remain constant over a range of variable characteristics, even after accounting for endogeneity issues. Our main contribution is the finding that investment and firm performance have a negative and significant relationship with economic policy uncertainty. As economic policy uncertainty raises the firm level, investment decreases, which ultimately impacts firm performance negatively. Thus, the study advises that policymakers make an effort to minimize the effect of economic policy uncertainty at a certain level. They must keep this uncertainty within a reasonable range since increased economic policy uncertainty will push businesses to minimize their short-term and long-term investments. Contribution/Originality: This research contributes favorably to a country's prospective investors and firms' internal environment to manage the investment opportunities during economic policy fluctuations. This study is one of the few studies examining the nexus between investment and firm performance under the economic policy uncertainty of manufacturing firms in Pakistan.

Marmara Üniversitesi, 2008

The aim of this study is to investigate whether investment decision of the Turkish firms operating in Manufacturing industry is sensitive to the uncertainty or not. The study is performed using panel data of Turkish Manufacturing Firms listed in Istanbul Stock Exchange for the period of 1993-2002. GARCH modeling, standard deviation of unpredictable part of stochastic variable and the normal standard deviation of variable are the methods to be employed in the construction of uncertainty proxy. In addition, to explore the sensitivity of reaction of investors to the different source of uncertainty, three variables are utilized. Real effective exchange rate index is used to construct economy wide uncertainty proxy. Real wage index of each industry and net sales of firms are chosen as representative of industry wide uncertainty and firm specific uncertainty, respectively. According to the panel data estimations results, economy wide uncertainty affects investment positively while industry wide and firm specific uncertainty affect negatively.

1997

Several recent studies have shown that uncertainty affects investment decisions. Specifically, demand and/or price uncertainty are found to depress corporate investment in e.g. the United States. This paper investigates whether similar results hold for Belgium and Spain, countries where financial markets are less developed and many firms evidently face financial constraints. Uncertainty of demand, output prices and investment prices are measured by the standard deviation of (pre-)filtered Belgian (1984-1992) and Spanish (1983-1993) panel data, and included as explanatory variables in the investment equations derived from a neo-classical model. The results indicate that investment behaviour towards uncertainty differs significantly between low- and high-leveraged firms in both Belgium and Spain.

Private spending on fixed capital goods has been an important topic of discussion among economists and policy makers. The influence of investment on growth and its volatility contributing to business cycles justify this focus. Recent empirical research has evaluated the effects of economic reforms, especially financial reforms, on capital formation and growth in developing countries. This issue sheds light on the link between financial and real variables. In traditional theory, this link is given by means of the real interest rate. However, credit may also have a direct effect on real variables by affecting consumption and investment when asymmetric information and/or excessive government intervention characterize the financial market.

Investment is one of the key drivers of effective demand and plays a pivotal role in determining long-term growth of monetary economies. Heterodox theory stresses several factors which contribute to define investment dynamics, especially uncertainty and the availability of financial resources (debt and its cost). This present paper aims at analyzing empirically the behavior of investments and their determinants in the period from 2003 to 2012 in Brazil, using the Keynesian-Kaleckian theoretical framework as a reference to our discussion and to offers insights to our econometric model. More specifically, we were interested in assessing whether the 2008-9’s global financial crisis changed the balance between the determinants of investments or not.