Investments and uncertainty revisited: The case of the US economy

Degiannakis, Stavros and Filis, George and Palaiodimos, George (2015): Investments and uncertainty revisited: The case of the US economy.

Abstract

This paper examines the relationship between investments and uncertainty for the US economy, as the latter is approximated by consumer sentiment, purchasing managers’ prospects and economic policy uncertainty. Contrary to the existing literature, we provide evidence that this relationship is time-varying. The time variation is attributed to the observed temporal replacement effect between private and public investments. Furthermore, we show that there are two distinct correlation regimes in this relationship and unless we concentrate on the two regimes, we cannot fully unravel the real link between uncertainty and investments. Finally, we examine whether the use of two correlation regimes provides better forecasts of investments compared to the use of the uncertainty indices alone. The forecasting exercise reveals that the use of correlation regimes provides statistically superior out-of-sample forecasts.

• Item Type: MPRA Paper
• Language: English
• Keywords: Uncertainty, public investments, private investments, gross fixed capital formation, dynamic correlation, forecast.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General

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