The Impact of Uncertainty on Investment Plans

National Bank of Belgium Working Paper No. 24

41 Pages Posted: 18 Oct 2010

See all articles by Paul Butzen

Paul Butzen

National Bank of Belgium

Catherine Fuss

National Bank of Belgium

Philip Vermeulen

European Central Bank (ECB)

Date Written: May 1, 2002

Abstract

In this paper we investigate how demand and output price uncertainty affect investment plans of Belgian manufacturing firms. We obtain time-varying uncertainty measures at the firm and industry level from the Belgian monthly business cycle survey and investment plans from the half-yearly investment survey. Using investment plans instead of realised investment data, e.g. annual accounts data, is, from an informative point of view, superior since it is more likely to reveal the features of the decision formation process and, therefore, it is most closely related to economic theory. Business investment is normally planned well in advance, because it involves time and costs to implement, and theory describes the behaviour of firms at the moment of their decision, which can be assumed to be fully captured in survey data. In order to find robust predictions we estimate three different specifications, each of which can be considered as a benchmark in the literature: two reduced form equations and a structural Euler equation. Our results show that uncertainty depresses investment. These results hold for industry- as well as for firmspecific demand uncertainty. Moreover, referring to Euler equation, uncertainty postpones investment today in favour of investment tomorrow. This effect is stronger for firms with more irreversible investment. Hence, our results seem to confirm to predictions of the real option theory.

Keywords: investment, uncertainty, irreversibility, real options, survey data

JEL Classification: D92, E22, D82, C23

Suggested Citation

Butzen, Paul and Fuss, Catherine and Vermeulen, Philip, The Impact of Uncertainty on Investment Plans (May 1, 2002). National Bank of Belgium Working Paper No. 24. Available at SSRN: https://ssrn.com/abstract=1692687 or http://dx.doi.org/10.2139/ssrn.1692687

Paul Butzen (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Catherine Fuss

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Philip Vermeulen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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