Asymmetric effects of policy uncertainty on domestic investment in G7 countries

Abstract

Few studies in the literature have argued or empirically shown that the link between domestic investment and an uncertainty measure is nonlinear, or that the response of investment to uncertainty is asymmetric. None have used asymmetric error-correction modeling and asymmetric cointegration to address the issue. In this paper, we fill this gap by first applying the symmetric and linear ARDL approach of Pesaran et al. (2001) and then applying the asymmetric and nonlinear ARDL approach of Shin et al. (2014) to show that the link between the aforementioned variables is indeed nonlinear in all G7 countries, and that the effects of policy uncertainty on domestic investment is asymmetric in the short run and in the long run, again, in all G7 countries.