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Volatility and the Investment Response

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  • Joshua Aizenman
  • Nancy P. Marion

Abstract

We use the World Bank decomposition of aggregate investment shares into their private and public components to test for the correlation between volatility and investment in a set of developing countries. We uncover a statistically significant negative correlation between various volatility measures and private investment, even when adding the standard control variables. No such correlation is uncovered when the investment measure is the sum of private and public investment spending. Indeed, public investment spending is positively correlated with some measures of volatility. We also use the new World Bank data to redo the Ramey and Ramey (1995) test for a correlation between investment and the standard deviation of innovations to a forecasting equation for growth. While Ramey and Ramey found no significant correlation using aggregate investment data, we find a negative and highly significant relationship between innovation volatility and private investment in developing countries. These findings suggest that the detrimental impact of volatility on investment may be difficult to detect using aggregate data.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5841.

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Date of creation: Nov 1996
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Publication status: published as (Published as "Volatility and Investment") Economica, Vol. 66 (1999): 157-179.
Handle: RePEc:nbr:nberwo:5841

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  1. Pfeffermann, G.P. & Madarassy, A., 1992. "Trends in Private Investment in Developing Countries," Papers 16, World Bank - International Finance Corporation.
  2. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  3. Aizenman, Joshua & Marion, Nancy P, 1993. "Policy Uncertainty, Persistence and Growth," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 145-63, June.
  4. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  5. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  6. Pfeffermann, G.P. & Madarassy, A., 1992. "Trend in Private Investment in Developing Countries," Papers 14, World Bank - International Finance Corporation.
  7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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Cited by:
  1. J Benson Durham, . "A Survey of the Econometric Literature on the Real Effects of International Capital Flows in Lower Income Countries," QEH Working Papers qehwps50, Queen Elizabeth House, University of Oxford.
  2. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
  3. J. Benson Durham, 2003. "Foreign portfolio investment, foreign bank lending, and economic growth," International Finance Discussion Papers 757, Board of Governors of the Federal Reserve System (U.S.).
  4. Bayraktar, Nihal & Fofack, Hippolyte, 2007. "Specification of investment functions in Sub-Saharan Africa," Policy Research Working Paper Series 4171, The World Bank.
  5. Demir, Firat, 2006. "Volatility of short term capital flows, financial anarchy and private investment in emerging markets," MPRA Paper 3080, University Library of Munich, Germany, revised May 2007.
  6. J Benson Durham, . "Econometrics of the Real Effects of Cross-Border Capital Flows in Emerging Markets," QEH Working Papers qehwps52, Queen Elizabeth House, University of Oxford.
  7. David Stasavage, 2000. "Private investment and political uncertainty," LSE Research Online Documents on Economics 6653, London School of Economics and Political Science, LSE Library.
  8. Mariarosaria Agostino, 2004. "Conditionality, Commitment and Investment Response in LDCs," Economics Working Papers 2004-10, School of Economics and Management, University of Aarhus.
  9. Guglielmo Maria Caporale & Thouraya Hadj Amor & Christophe Rault, 2011. "Sources of Real Exchange Rate Volatility and International Financial Integration: A Dynamic GMM Panel Approach," CESifo Working Paper Series 3645, CESifo Group Munich.
  10. Buscher, Herbert & Mueller, Claudia, 1999. "Exchange Rate Volatility Effects on the German Labour Market: A Survey of Recent Results and Extensions," IZA Discussion Papers 37, Institute for the Study of Labor (IZA).
  11. Demir, Firat, 2006. "Volatility of short term capital flows and socio-political instability in Argentina, Mexico and Turkey," MPRA Paper 1943, University Library of Munich, Germany.
  12. Ansgar Belke & Daniel Gros, 2001. "Real Impacts of Intra-European Exchange Rate Variability: A Case for EMU?," Open Economies Review, Springer, vol. 12(3), pages 231-264, July.
  13. David Stasavage, 2000. "Private Investment and Political Uncertainty," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 25, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  14. Claudia Stirböck & Herbert Buscher, 2000. "Exchange rate volatility effects on labour markets," Intereconomics: Review of European Economic Policy, Springer, vol. 35(1), pages 9-22, January.

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