Expectation errors, uncertainty, and economic activity

Abstract

The aim of this study is to analyze the relationship between uncertainty and economic activity. For this purpose, we use a confidential firm level panel data set (Business Tendency Survey) from Turkey to form three uncertainty measures, namely total, idiosyncratic and aggregate uncertainty. In particular, we construct expectation errors of firms by comparing their survey responses about expectations and realizations on their production volume. Our results reveal countercyclical relationships between our uncertainty measures and economic activity. We further show that a one standard deviation increase in aggregate uncertainty is followed by a 0.5 percent decline in year-on-year change of industrial production on impact. The prolonged effect reaches more than 4.7 percent in a year for any of these three measures.

Economic Uncertainty: A Geometric Indicator of Discrepancy Among Experts’ Expectations

“…The arrival of the 2008 financial crisis has triggered a body of research dedicated to analyse the impact of uncertainty on the economy (Ajmi et al, 2015;Arslan et al, 2015;Atalla et al, 2016;Balcilar et al, 2017;Binder, 2017;Binding and Dibiasi, 2017;Bloom, 2014;Caggiano et al, 2014;Chua et al, 2011;Dovern, 2015;Fernández-Villaverde et al, 2015;Hartmann et al, 2017;Henzel and Rengel, 2017;Karnizova and Khan, 2015;Mitchell et al, 2007;Mokinski et al, 2015;Perić and Sorić, 2017;Sorić and Lolić, 2017).…”

Business uncertainty and investment: Evidence from Japanese companies

“…This is referred to as the option value of waiting. Recent empirical studies generally support the theoretical prediction that uncertainty has negative effects on equipment investment (Leahy and Whited, 1996;Guiso and Parigi, 1999;Ghosal and Loungani, 2000;Ogawa and Suzuki, 2000;Bloom et al, 2007;Baum et al, 2010;Bontempi et al, 2010;IMF, 2012;Kang et al, 2014;Kellogg, 2014;Arslan et al, 2015), R&D investment (Bloom, 2007;Caggese, 2012), and hiring of employees (Ono and Sullivan, 2013;Ghosal and Ye, 2015). 2 Bloom (2009), Bachmann et al (2013), and Leduc and Sill (2013) use macroeconomic time-series data to analyze the effects of uncertainty on GDP, industrial production, and employment, and find large negative effects of uncertainty on these macroeconomic variables.…”

“…derived from econometric models (Jurado et al, 2015), 5) subjective uncertainty in forecasting (Boero et al, 2008;Clements, 2008;Morikawa, 2013), 6) dispersion of companies' forecast errors (Bachmann et al, 2013;Arslan et al, 2015), and 7) frequency of newspaper articles regarding policy uncertainty (Baker et al, 2015;Gulen and Ion, 2016).…”

“…However, in reality, such data for individual companies or households rarely exist. 3 Among the alternative proxies of uncertainty, this study, following Bachmann et al (2013) and Arslan et al (2015), adopts 1) ex ante dispersion/disagreement of companies' forecasts and 2) ex post companies' forecast errors as measures of economic uncertainty. In creating these measures, we utilize company-level information from a nationally representative quarterly business survey in Japan: the Short-Term Economic Survey of Enterprises in Japan ("Tankan" survey) conducted by the Bank of Japan (BOJ).…”

Does Uncertainty Affect Non-response to the European Central Bank’s Survey of Professional Forecasters?

“…Abel et al (2015) and Paloviita and Viren (2014) also assumed that uncertainty is exogenous. Moreover, Bloom et al (2013) found no significant causal impact of industry growth rates on industry uncertainty, Arslan et al (2011) support the exogeneity of uncertainty based on Granger causality tests and endogeneity tests, and Haddow et al (2013) found unidirectional causality from uncertainty measures to confidence indicators.…”