Savings, Investment, and Economic Uncertainty: The Mediating Role of Institutional Quality
DOI:
https://doi.org/10.37134/Keywords:
Economic uncertainty, Institutional quality, Savings, InvestmentAbstract
Economic uncertainty has become a persistent and structural feature of the global economy, shaping household and firm behavior beyond short-term cyclical fluctuations. This paper develops an integrated conceptual framework to examine how economic uncertainty influences savings and investment, with particular emphasis on the mediating role of institutional quality. Drawing on precautionary savings theory and irreversible investment theory, the framework highlights that economic uncertainty directly stimulates household savings through heightened precautionary motives while discouraging corporate investment via increased option values of waiting. Beyond these direct channels, the paper argues that economic uncertainty also operates indirectly by weakening institutional quality, thereby amplifying risk perceptions, undermining policy credibility, and increasing regulatory and legal uncertainty. Institutional quality is conceptualized using internationally recognized governance dimensions that shape the predictability of economic environments and the security of economic rights. The framework further incorporates income and the current account as core conditioning variables that influence savings capacity, investment demand, and the transmission of domestic and external shocks. By synthesizing insights from macroeconomic theory, institutional economics, and open-economy perspectives, this study advances the literature by repositioning institutional quality as a central transmission mechanism linking economic uncertainty to savings and investment outcomes. The paper formulates theoretically grounded propositions to guide future empirical research and policy analysis. Overall, the framework offers a coherent lens for understanding the heterogeneous responses of savings and investment to economic uncertainty across different institutional and macroeconomic contexts.
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