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Credibility, Irreversibility of Investment, and Liberalization Reforms in LDCs

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  • Andrea Bassanini

Abstract

Empirical evidence of the impact of policy uncertainty on aggregate investment is mixed. However, if the relationship between policy uncertainty and investment performance is nonlinear, linear regression exercises might not capture the effect of policy uncertainty. In this paper, I present a simple model with investment irreversibility which shows that, in the presence of legal constraints on investment in foreign assets, domestic real investment performance is poorer when liberalization reforms are only partially incredible.

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  • Andrea Bassanini, 2006. "Credibility, Irreversibility of Investment, and Liberalization Reforms in LDCs," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 35(2), pages 203-218, July.
    • Handle: RePEc:bla:ecnote:v:35:y:2006:i:2:p:203-218
    DOI: 10.1111/j.1468-0300.2006.00165.x
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    1. Van Wijnbergen, Sweder, 1985. "Trade reform, aggregate investment and capital flight : On credibility and the value of information," Economics Letters, Elsevier, vol. 19(4), pages 369-372.
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    Cited by:

    1. Veenendaal, Paul J.J., 2007. "The EU-ETS and existing energy taxes," Conference papers 331606, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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