Abstract

http://ssrn.com/abstract=1735982
 
 

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Expectation Errors, Uncertainty and Economic Activity


Yavuz Arslan


Central Bank of Turkey

Aslihan Atabek


Central Bank of Turkey

Timur Hülagü


Central Bank of Turkey

Saygin Sahinoz


Central Bank of Turkey

August 17, 2011


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. In addition to the macroeconomic implications of uncertainty, we exploit the panel dimension of our data set to investigate the effects of firm specific uncertainty on that firm's investment decisions. Ordered probit estimation results show that if a firm makes more expectation errors -faces more uncertainty- it is more likely to defer investment plans even after controlling the aggregate uncertainty.

Number of Pages in PDF File: 42

Keywords: Uncertainty, economic activity, expectation errors

JEL Classification: D8, C43, C82, E22, E32

working papers series


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Date posted: January 9, 2011 ; Last revised: September 9, 2011

Suggested Citation

Arslan, Yavuz and Atabek, Aslihan and Hülagü, Timur and Sahinoz, Saygin, Expectation Errors, Uncertainty and Economic Activity (August 17, 2011). Available at SSRN: http://ssrn.com/abstract=1735982 or http://dx.doi.org/10.2139/ssrn.1735982

Contact Information

Yavuz Arslan (Contact Author)
Central Bank of Turkey ( email )
Istiklal Cad No:10
Ankara, 0600
Turkey
Aslihan Atabek
Central Bank of Turkey ( email )
Ankara
Turkey
Timur Hulagu
Central Bank of Turkey ( email )
Ankara
Turkey
Saygin Sahinoz
Central Bank of Turkey ( email )
Ankara
Turkey
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