The effect of inflation uncertainty on private investment in Iran

In traditional investment theories, it is assumed that investment decisions accomplish under certainty, while in the developing countries including Iran, there exist high degree of macroeconomic uncertainty. Growth, inflation, exchange rate and the other important macroeconomic variables are more fluctuating than industrial countries. The effects of the high fluctuation have been considered on several variables such as growth, investment and trade in recent researches. It is assumed that high fluctuation of inflation rate makes environment uncertain for investor’s decision making. Examining the effect of inflation uncertainty on private investment is the objective of this research. In this respect for measuring variable of inflation uncertainty, first inflation rate regressed on lags of itself and the best length of lag was determined by using Schwarz- Baysian criterion which results indicated that the first lag was the best. In the next step, the index of inflation uncertainty was computed with generalized autoregressive conditional Heteroscedasticity (GARCH) model and it was used as a proxy for inflation uncertainty. The relation between investment and inflation uncertainty was obtained by using autoregressive distributed lags (ARDL) model and the effect of inflation uncertainty was considered by other influential traditional variables on investment including gross domestic product (GDP), interest rate of bank facilities and inflation rate. The results indicate that the inflation uncertainty has negative effect on investment in short run and long run. It is also concluded that the effect of GDP is positive and significant but interest rate and inflation rate have a negative and significant effects. Co-integration test results show that there is a long run equilibrium relationship between variables and the coefficient of error correction term reveals the high rate of adjustment toward long run equilibrium.