Effects of economic policy uncertainty and political uncertainty on business confidence and investment

Abstract

PurposeThis study estimates the effects of political uncertainty and economic policy uncertainty on business confidence. Moreover, it also examines business confidence as a transmission channel of political uncertainty and economic policy uncertainty to investment.Design/methodology/approachThe study addresses the Brazilian case from May 2004 to December 2017. Brazil experienced situations of political instability and public distrust in government and its policies, which reflected on the economic environment. The study uses two business confidence indicators that capture entrepreneurs' sentiment in relation to their business and the economy. All models are estimated using ordinary least squares and generalized method of moments.FindingsThe estimates reveal that increases in both political uncertainty and economic policy uncertainty reduce business confidence. The findings also indicate that business confidence acts as a transmission mechanism, i.e. uncertainties affect investments through business confidence.Practical implicationsThe findings point to the following practical implications related to the existence of uncertainties in the Brazilian economy: different institutional difficulties and government indecisions have blurred the political scene and caused political uncertainties. In addition, the same aspects that blurred the political scene also caused uncertainties in relation to economic policy that undermined business confidence, and affected investment.Originality/valueThere is a vast literature on business confidence, as well as studies addressing the relationship between business confidence and investment. This study differs from other studies as follows: in addition to the political uncertainty, it also analyzes the effect of economic policy uncertainty on business confidence; it uses different measures to capture political instability, and it analyzes whether business confidence acts as a transmission channel of both uncertainties to investments.