8 The predicted effect  Chart 7: The reduction in investment has been driven by firms that expect a resolution soon  is quite powerful: at least in this highly stylised set-up, halving the expected duration of the uncertainty (i.e. doubling q) has the same impact on the required rate of return on new investment as doubling the chances or scale of the bad outcome. Directionally, at least, I think the evidence provides some support for this effect. The  Sources: Decision Maker Panel and Bank calculations. fact that protracted declines in investment were seen only in 2018, some time after the referendum but increasingly close to (what was expected to be) the exit date in March 2019, is consistent with it. So too is Chart 7. Taken from the latest Decision Maker Panel survey, it suggests that the firms who’ve cut back the most on their investment spending tend to be those who also expect a relatively early resolution to Brexit. Firms who think the process will take longer – and obviously those (in blue) who don’t consider Brexit an important factor in their decisions to begin with – have been less aggressive in their response. One implication is that the overall hit to investment is worse than it need be if firms have unrealistic expectations about how rapidly the situation is likely to be resolved.
If, on the other hand, it thinks there’s going to be an imminent resolution (high q, low E[T]), there is every incentive to wait until that actually happens. In the meantime only extremely high-return projects would get the go-ahead. One general implication of this is that empirical estimates of the impact of uncertainty on investment, which generally assume that the effect is purely contemporaneous – investment today is a function solely of uncertainty today – are (strictly speaking) an over-simplification. At least in principle it will also depend on how long businesses expect any uncertainty to endure: the shorter the expected duration the greater the predicted impact. I doubt this would ever be straightforward to test empirically. As hard as it is to measure uncertainty very precisely it’s obviously harder to gauge accurately how long people expect that uncertainty to last. But the distinction may nonetheless matter on occasion. One such occasion is when there is thought to be a particular date at which important information is likely to be revealed. If so, then [3] suggests that the effect of uncertainty on investment should intensify the closer  8  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  8  one gets to that point. As the remaining time shortens the perceived cost of waiting for news falls with it.