On Measuring Uncertainty and its Impact on Investment: Cross-Country Evidence from the Euro Area

By Philipp Meinen, Oke Röhe. Social Science Research Network, 2017

163 citations recorded by the source corpus.

Investment fell sharply in the euro area after the financial crisis and has not yet returned to pre-crisis levels in many core economies. Focusing on the four largest euro-area countries, this paper investigates the role of uncertainty for investment dynamics. By doing so, we compare five prominent uncertainty proxies put forward in the recent literature: the (implied) stock market volatility, a survey-derived measure of expectations dispersion, a newspaper-based indicator of policy uncertainty, and two indicators taking up the concept of (econometric) unpredictability. Although all uncertainty measures show countercyclical behavior, we find uncertainty as measured by the conditional volatility of the unforecastable components of a broad set of time series to exhibit noticeable robust effects across different model specifications and countries. Based on this type of uncertainty proxy, we document pronounced negative investment responses to uncertainty shocks. We further show that these effects can explain a relevant portion of the decrease in investment in the course of the Great Recession.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/d97220e002e14abac1b16e662545a004b3a9539e

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

Citations in the corpus

The impact of uncertainty shocks on the volatility of commodity prices (2018, background): “Uncertainty shocks have a significant negative impact on the macroeconomy (Bloom, 2009; Colombo, 2013; Jurado et al., 2015; Baker et al., 2016; Caldara et al., 2016; Henzel and Rengel, 2017; Meinen and Roehe, 2017).”
A new economic policy uncertainty index for Spain (2019, background): “2The BBD EPU index has been borrowed in a number of empirical applications: e.g. Meinen and Roehe (2017); Fontaine et al. (2017); Caggiano et al. (2017); Colombo (2013), or has inspired newly constructed indexes (like Shoag and Veuger (2016) for the US states).”