Effect of exchange rate uncertainty on private investment: empirical analysis for Iran

From a theoretical point of view, uncertainty affects investment decisions. The sign of overall effect of uncertainty on investment is ambiguous and could be found only by empirical analysis. In this study the volatility of prices and exchange rate are considered as source of uncertainty. Of different criteria for the calculation of uncertainty, an exponential generalised auto regressive conditional heteroskedasticity (EGARCH) and power auto regressive conditional heteroskedasticity (PARCH) models are used to measure the uncertainty of inflation and exchange rate respectively. This study investigates the effect of macroeconomic uncertainty on private sector investment in Iran during 1971 to 2008. Cointegration and vector error correction models are used to obtain the estimates of the cointegrating relations and the long-run dynamics, respectively. The results show that uncertainty and interest rate have significant negative effect on private investment in the long run in Iran while the GDP has significant positive effect on private investment.