On measuring uncertainty and its impact on investment: Cross-country evidence from the euro area

Abstract

In view of the sluggish recovery of euro area investment in the course of the financial and sovereign debt crisis, the role of aggregate uncertainty as an impediment to growth has been a topic of heightened interest. While theory points to a number of channels through which an adverse impact of uncertainty on investment can be rationalized, empirical research suffers from the lack of an objective measure of uncertainty, complicating a sound evaluation of uncertainty and its effect on investment. Hence, it is hardly surprising that the literature comes up with a range of uncertainty proxies which, from a conceptual point of view, vary in some cases substantially. ContributionFocussing 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 surveyderived measure of expectations dispersion, a newspaper-based indicator of policy uncertainty, and two indicators taking up the concept of (econometric) unpredictability. The analysis of the different uncertainty proxies is conducted on the grounds of both descriptive and VAR model-based evidence. ResultsAlthough all uncertainty measures show countercyclical behaviour, 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. This is remarkable as the indicator is closely related to the typical notion of uncertainty by approximating the purely unforecastable component of future values of macroeconomic indicators given the information set available to an economic decision maker. Based on this type of uncertainty proxy, we document pronounced negative investment responses to uncertainty shocks. Moreover, we find that uncertainty can account for a relevant portion of the decrease in gross fixed capital formation in machinery and equipment in the course of the Great Recession. Deutsche BundesbankAbstract 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 r...

Trade Uncertainty and Investment in the Euro Area

“…Studies focusing on the euro area also find a strong and statistically significant negative relationship between macroeconomic uncertainty and investment. Meinen and Roehe (2017) used various uncertainty proxies to document pronounced negative investment responses to uncertainty shocks in the euro area. Similar findings are also described by Gieseck and Largent (2016) for the period 1999-2015.…”

Uncertainty and the Great Recession

“… Meinen and Röhe () also use that approach to analyse the effects of uncertainty on investment in France, Germany, Italy and Spain. …”

“…Meinen and Röhe (2017) also use that approach to analyse the effects of uncertainty on investment in France, Germany, Italy and Spain.© 2017 The Department of Economics, University of Oxford and John Wiley & Sons Ltd…”

Transmission of uncertainty shocks: Learning from heterogeneous responses on a panel of EU countries

“…Some evidence for the euro area is provided by Balta et al (2013), Gieseck and Largent (2016) and Girardi and Reuter (2016). Meinen and Röhe (2017) offer evidence for the four largest EA countries (Germany, France, Italy and Spain) using diverse measures of uncertainty. These studies confirm the detrimental impact of uncertainty shocks on the real economy, especially investment.…”