MACROECONOMIC UNCERTAINTY AND DOMESTIC INVESTMENT: Evidence from Developing Countries

Zainab JEHAN* and Noor-us-Saba MUNEEB**

Macroeconomic uncertainty and instability is predominantly and pervasively faced by developing countries, despite application and adoption of varying adjustment policies. Its implications are many and far reaching. This research is conducted to empirically analyze the impact of macroeconomic uncertainty in both the internal and external sectors, on domestic investment in the selected developing countries. For this purpose, a panel of 63 developing countries for the time period 1970 to 2013 has been selected. The uncertainty of selected macroeconomics indicators; namely, the output, inflation, RER and TOT are computed by using the AR (1) models, whereas, instrumental variable approach is employed for empirical estimation. The results show that all types of macroeconomic uncertainty, adversely affect the level of investment. Moreover, the adverse impact of external sector uncertainty is dominant relative to the internal sector uncertainty. It is, therefore, suggested that appropriate policy actions are needed to ensure macroeconomic stability in order to increase domestic investment.