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Economic policy uncertainty and investment in Spain

Author

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  • Daniel Dejuan-Bitria

    (University Pompeu Fabra)

  • Corinna Ghirelli

    (Bank of Spain, Directorate General Economics, Statistics and Research)

Abstract

The aim of this paper is to investigate the effect of economic policy uncertainty on firms’ investment decisions. We focus on Spain for the period 1998–2014. To measure policy-related uncertainty, we borrow the economic policy uncertainty (EPU) indicator available for this country. We find strong evidence that uncertainty reduces corporate investment. This relationship appears to be nonlinear, being the marginal effect of uncertainty attenuated toward zero during periods of high uncertainty levels. Furthermore, the heterogeneous results suggest that the adverse effect of uncertainty is particularly relevant for highly vulnerable firms. Overall, these results are consistent with the hypotheses that economic policy-related uncertainty reduces corporate investment through increases in precautionary savings or to worsening of credit conditions.

Suggested Citation

  • Daniel Dejuan-Bitria & Corinna Ghirelli, 2021. "Economic policy uncertainty and investment in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(3), pages 351-388, September.
  • Handle: RePEc:spr:series:v:12:y:2021:i:3:d:10.1007_s13209-021-00237-5
    DOI: 10.1007/s13209-021-00237-5
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    References listed on IDEAS

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    2. Xuan Yang & Shihao Mao & Luxuan Sun & Chao Feng & Yinshuang Xia, 2022. "The Effect of Economic Policy Uncertainty on Green Technology Innovation: Evidence from China’s Enterprises," Sustainability, MDPI, vol. 14(18), pages 1-17, September.
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    More about this item

    Keywords

    Corporate investment; Economic policy uncertainty; EPU; Financial frictions;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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