I present a model economy where policy uncertainty creates short-term bias in investment and leads to a higher capital price and lower long-run investment and output. I conduct a calibration exercise using a set of industry-level investment data across countries. Between the lowest-income and the highest-income countries, policy uncertainty can account for capital price and investment-level differences by a factor of about 3 and for the output-level difference by a factor of about 2. Copyright Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.
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