Aggregate uncertainty, investment and asymmetric adjustment in the UK manufacturing sector

Abstract

Theory suggests that the level of uncertainty facing firms should affect both the rate of adjustment to, and the steady state level of, investment, although there is ambiguity about the sign of the effect. A non-linear model of investment behaviour incorporating time varying adjustment speeds with threshold effects is estimated for the UK manufacturing sector. The most general non-linear specification is found to be most congruent with the data. Uncertainty has a large and significant effect on both levels and rates of adjustment.

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