Uncertainty and Private Investment Decision in Malaysia

Abstract

This study examines the effects of uncertainty on irreversible aggregate investment using data from 1971-2010. Results provide evidence to support the argument that macroeconomic uncertainties are important in the forward-looking investment decision-making process. This study concludes that the demand and lagged demand uncertainties have a relatively stronger effect on investments compared with other macro uncertainties. The structure of the economy, the depth of the financial system, and the promotion of trade openness reduce the negative impact of uncertainties on investment. The study also finds the elasticity of the user cost of capital to be less than unity, indicating limited scope for governments to influence investment through tax incentives.