The effect of uncertainty on UK investment authorisation: Homogeneous vs. heterogeneous estimators

Ciaran Driver, Katsushi Imai, Paul Temple, Giovanni Urga

Research output: Contribution to journalArticlepeer-review

Abstract

This paper compares pooled and non-pooled models of UK capital investment using the Confederation of British Industry's (CBI) Industrial Trends Survey, focusing on the impact of uncertainty. The uncertainty measure is based on the cross sectional dispersion of optimism about the future business conditions in the industry in which the firm operates. The panel data estimation shows that uncertainty has quantitatively important negative effects on investment. However, if we look at the estimation results at the industry level, we find a great diversity in both estimated elasticities and t-statistics, providing valuable information not available from the pooled model. Finally, we compare the forecast performances of the above models; this analysis confirms that pooled estimators are generally better than non-pooled estimators in terms of out-of-sample forecast performance, but the difference between the two is not very large.
Original languageEnglish
Pages (from-to)115-128
Number of pages13
JournalEmpirical Economics
Volume29
Issue number1
DOIs
Publication statusPublished - Jan 2004

Keywords

  • Investment
  • Panel data estimation
  • Uncertainty

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