Investment and Uncertainty in the G7

In this paper we assess the impact of a comprehensive range of macroeconomic and financial measures of uncertainty on business investment in the major industrial countries using Pooled Mean Group Panel Estimation. We discover a significant negative long run effect from both nominal and real exchange rate volatility using a GARCH (1,1) approach on aggregate investment for the G7. This is also found in poolable subgroups including all four larger European countries. Results for an adverse impact of uncertainty on investment are also found for volatility of long rates in recent years but not for inflation, share prices and industrial production. The results imply that to the extent that EMU favours lower exchange rate and long interest rate volatility, it will also be beneficial to investment.