| Abstract: | Theory suggests that the level of uncertainty affects the investment decision for firms, although the sigh of the effect is ambiguous. A GARCH-M estimator is used to model the conditional variance of GDP as a proxy for uncertainty. This measure is then employed in a simple model of the investment decision. The results are that the level of aggregate uncertainty has a significant negative effect on manufacturing investment. In particular periods there were very large effects - on average, uncertainty reduces investment by about 5%, but in 1974 the effect peacked at 48%. |
