The effects of macroeconomic uncertainty on irreversible investment

I study the effects of demand and supply uncertainty on irreversible investment. My objective is two fold. First, I investigate whether demand and supply uncertainty have similar effects on investment. Second, I study the effects of sunk costs on investment.; I make three contributions to the existing literature. First, I develop a methodology for analyzing the effects of demand and supply uncertainty on the level of investment where sunk costs interact with the both uncertainty measures in the estimation equation. Second, I explore the extent to which the uncertainty-investment relationship is affected by the magnitude of sunk costs. Third, I address the econometric issues raised by estimating a regression equation in which generated regressors appear.; I use two different data sets in my empirical analyses. In Chapters 1 and 2, I evaluate the effects of industry-wide uncertainty and sunk costs on the level of investment in 2-digit Turkish manufacturing industries. In Chapter 3, I investigate how demand and supply uncertainty, and sunk costs affect the aggregate manufacturing investment in thirteen OECD countries.; In Chapters 1 and 2, I find that the effect of supply uncertainty on investment is negative in full sample estimates and in the sample of industries where demand is price elastic. The estimated impact, however, is positive in the sample of industries where demand is price inelastic. I also find that investment is negatively associated both with sunk costs and the demand uncertainty.; In Chapter 3, I find that the negative quantitative impact of the demand uncertainty on investment is larger than the impact of the supply uncertainty measure and that the estimated effects of the sunk cost proxy and the demand uncertainty measure are negative and statistically significant. The results suggest that the methodology provides quite a good fit for the data on the OECD countries. Therefore, the empirical results suggest that interaction variables are key in studying sign of the uncertainty-investment relationship.; These empirical findings could have important implications for countries. They suggest that policy makers should take into consideration the interactions between different types of uncertainty and sunk costs.