Investment in Fixed Capital Stock: testing for the impact of sectoral and systemic uncertainty¤

This paper applies current theory concerning the impact of irreversibility of investment, in order to test for the impact of uncertainty on investment expenditure for a middle income country. The contribution of the paper is unique in two respects. First, it employs dynamic heterogeneous panel estimation techniques not previously applied to investment functions. Second, it explicitly tests for the impact of both sectoral and systemic uncertainty on investment expenditure. We ...nd that both sectoral (as measured by output volatility around potential output) and systemic uncertainty impacts negatively on investment rates in a middle income country context. However, sectoral uncertainty is more important for resource intensive manufacturing sectors, while systemic uncertainty has a generalized impact across all manufacturing sectors. Standard proxies for expected return on capital stock, and the user cost of capital perform in accordance with theoretical priors.