Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/215896 
Year of Publication: 
2020
Series/Report no.: 
IWH Discussion Papers No. 5/2020
Publisher: 
Halle Institute for Economic Research (IWH), Halle (Saale)
Abstract: 
This paper analyses how firm-specific forecast errors derived from survey data of German manufacturing firms over 2007-2011 affect firms' investment propensity. Understanding how forecast errors affect firm investment behaviour is key to mitigate economic downturns during and after crisis periods in which forecast errors tend to increase. Our findings reveal a negative impact of absolute forecast errors on investment. Strikingly, asymmetries arise depending on the size and direction of the forecast error. The investment propensity declines if the realised situation is worse than expected. However, firms do not adjust investment if the realised situation is better than expected suggesting that the uncertainty component of the forecast error counteracts positive effects of unexpectedly favorable business conditions. Given that the fraction of firms making positive forecast errors is higher after the peak of the recent financial crisis, this mechanism can be one explanation behind staggered economic growth and slow recovery following crises.
Subjects: 
risk climate
microeconomic survey data
forecast errors
firm investment
uncertainty
JEL: 
D22
D84
E32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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