Seminar - Luke Meehan on Uncertainty and investment in Japan

Does uncertainty matter for Japanese investment, and does this impact vary over time? Real options theory suggests increases in uncertainty should have negative impacts on investment. Bloom et al (2012) suggest the non-linear impacts of these shocks are key drivers of investment activity and the business cycle. This paper uses time-varying parameter VAR methods to evaluate two simple models of investment with two different uncertainty instruments. I find uncertainty shocks have significant short-term depressive effects on investment throughout 1990-2011, but that medium-term effects are instrument-dependent. These results suggest a role for uncertainty shocks beyond simple recession epiphenomena.

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