On uncertainty and investment rates : with empirical analysis of developed economies

Abstract

This thesis investigates the impact of uncertainty on investment rates. The theoretical and empirical literature on the subject is surveyed before I do an empirical analysis on investment data for 14 developed economies from 1991-2008. There are three main results from this analysis: I confirm the conclusion of most studies that uncertainty overall has a negative impact on investments. I find no evidence of non-monotonicity or even non-linearity in the effect based on the level of uncertainty. This has been found in other recent studies. On the other hand, I explain theoretically and show that there is a non-linearity in the effect of uncertainty on investment based on the direction of stock market price movements the previous year. This has not been investigated before.