Policy Uncertainty and Investment in Spain.

Abstract

The aim of this paper is to investigate the effect of policy uncertainty on firms’ investment decisions. We focus on Spain for the period 1998-2014. To measure policy-related uncertainty, we use a new macroeconomic indicator constructed for this country. We find strong evidence that policy uncertainty reduces corporate investment. Furthermore, the heterogeneous results suggest that the adverse effect of policy uncertainty is particularly relevant for highly vulnerable firms. In particular, non-exporting firms, small and medium enterprises, as well as firms in poorer financial condition are shown to decrease investment significantly more than their counterparts. Overall, these results are consistent with the hypotheses that policy-related uncertainty reduces corporate investment through increases in precautionary savings or to worsening of credit conditions.

Keywords: corporate investment, policy uncertainty, financial frictions.

JEL Classification: D80, E22, G18, G31, G38.