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Macroeconomic uncertainty and private investment in developing countries - an empirical investigation

Author

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  • Serven, Luis
Abstract
The impact of uncertainty on investment has attracted considerable attention in the analytical and empirical macroeconomic literature. In theory, however, uncertainty can affect investment through different channels, some of which operate in mutually opposing direction. So, the sigh of its overall effect is ambiguous and can be assessed only empirically. To thoroughly assess the impact of macroeconomic uncertainty on private investment, the author uses a large panel data set on developing countries. He draws a distinction between sample variability and uncertainty, constructs alternative measure of the volatility of innovations to five key macroeconomic variables (inflation, growth, the terms of trade, the real exchange rate, and the price of capital goods), and examines their association with aggregate private investment. He then adds these constructed measures to an empirical investment equation that is estimated using alternative panel data econometric methods, allowing for simultaneity, country-specific effects, and parameter heterogeneity across countries. The results underscore the robustness of the link between investment and uncertainty. Virtually all of the volatility measures in the paper show a strong negative association with investment ratios. In addition, the regression estimates indicate that uncertainty has an adverse direct impact on investment, over and above any indirect effect that might also be at work. This finding is particularly robust in the case of real exchange rate volatility, which invariably has a robust negative effect on investment, regardless of econometric specification.

Suggested Citation

  • Serven, Luis, 1998. "Macroeconomic uncertainty and private investment in developing countries - an empirical investigation," Policy Research Working Paper Series 2035, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2035
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    References listed on IDEAS

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    Cited by:

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    9. Hossam ELdin Mohammed Abdelkader, 2015. "Political Instability, Uncertainty, Democracy, and Economic Growth in Egypt," Working Papers 953, Economic Research Forum, revised Oct 2015.
    10. Eunbi Kim, 2023. "Top management staffing and subsidiary performance under home-country uncertainty," Asian Business & Management, Palgrave Macmillan, vol. 22(4), pages 1513-1543, September.
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    13. René Tapsoba, 2012. "Does Inflation Targeting Matter for Attracting Foreign Direct Investment into Developing Countries?," CERDI Working papers halshs-00667203, HAL.
    14. Dehn, Jan, 2000. "The effects on growth of commodity price uncertainty and shocks," Policy Research Working Paper Series 2455, The World Bank.
    15. Bianca Clausen, 2008. "Real Effective Exchange Rate Uncertainty, Threshold Effects, and Aggregate Investment – Evidence from Latin American Countries," IWP Discussion Paper Series 02/2008, Institute for Economic Policy, Cologne, Germany.
    16. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
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    18. Fernández-Méndez, Laura & García-Canal, Esteban & Guillén, Mauro F., 2015. "Legal Family and Infrastructure Voids as Drivers of Regulated Physical Infrastructure Firms' Exposure to Governmental Discretion," Journal of International Management, Elsevier, vol. 21(2), pages 135-149.
    19. Calderón, César & Kubota, Megumi, 2018. "Does higher openness cause more real exchange rate volatility?," Journal of International Economics, Elsevier, vol. 110(C), pages 176-204.
    20. Fernández-Méndez, Laura & García-Canal, Esteban & Guillén, Mauro F., 2018. "Domestic political connections and international expansion: It's not only ‘who you know’ that matters," Journal of World Business, Elsevier, vol. 53(5), pages 695-711.
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    23. Febrio Kacaribu & Syahda Sabrina & Teuku Riefky, 2021. "Does The Service Trade Openness Mitigate Real Exchange Rate Volatility?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 24(2), pages 237-254, June.

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