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Expectation errors, uncertainty, and economic activity

Author

Listed:
  • Yavuz Arslan
  • Aslıhan Atabek
  • Timur Hulagu
  • Saygın Şahinöz
Abstract
In this article we analyse the relationship between uncertainty and economic activity. For this purpose, we use a firm-level panel data set from Turkey to form proxies for uncertainty by using expectation errors of firms about their production volumes. The identifying assumption is that the probability of making an expectation error increases when the uncertainty faced increases. An analysis of the downturn in 2008–2009 shows that 44% of the decline in industrial production can be attributed to increased uncertainty. Moreover, we show that if a firm faces higher uncertainty it is more likely that it defers its investment plans.

Suggested Citation

  • Yavuz Arslan & Aslıhan Atabek & Timur Hulagu & Saygın Şahinöz, 2015. "Expectation errors, uncertainty, and economic activity," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 634-660.
    • Handle: RePEc:oup:oxecpp:v:67:y:2015:i:3:p:634-660.
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    File URL: http://hdl.handle.net/10.1093/oep/gpv003
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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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