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

Posted: 19 Dec 2016

See all articles by Philipp Meinen

Philipp Meinen

Deutsche Bundesbank

Oke Röhe

Deutsche Bundesbank

Date Written: 2016

Abstract

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.

Keywords: Uncertainty, Investment, Euro Area

JEL Classification: C53, D81, E22, E32

Suggested Citation

Meinen, Philipp and Röhe, Oke, On Measuring Uncertainty and its Impact on Investment: Cross-Country Evidence from the Euro Area (2016). Bundesbank Discussion Paper No. 48/2016, Available at SSRN: https://ssrn.com/abstract=2886999

Philipp Meinen (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Oke Röhe

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
44
Abstract Views
413
PlumX Metrics