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Policy variability and economic growth

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  • Hugo A. Hopenhayn
  • Maria E. Muniagurría

Abstract

This paper explores the effect of policy variability (or frequency of regime switching) on economic growth and welfare. The authors study a one-sector growth model where investment can be subsidized at either a positive rate or not subsidized at all. They find that the lack of persistence in policies per se need not be welfare reducing and that it is likely to decrease growth. Higher variability implies more frequent changes in consumption and investment. But, by creating a stronger intertemporal link across regimes, variability reduces the fluctuation in investment rates, thus decreasing the magnitude of changes in consumption and increasing welfare. Copyright 1996 by The Review of Economic Studies Limited.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 30.

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Date of creation: Feb 1993
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Handle: RePEc:upf:upfgen:30

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  1. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S126-50, October.
  2. Robert G. King & Sergio T. Rebelo, 1989. "Transitional Dynamics and Economic Growth in the Neoclassical Model," NBER Working Papers 3185, National Bureau of Economic Research, Inc.
  3. Ann Harrison, 1995. "Openness and Growth: A Time-Series, Cross-Country Analysis for Developing Countries," NBER Working Papers 5221, National Bureau of Economic Research, Inc.
  4. Joshua Aizenman & Nancy Marion, 1991. "Policy Uncertainty, Persistence and Growth," NBER Working Papers 3848, National Bureau of Economic Research, Inc.
  5. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 485-517, June.
  6. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 1008-38, October.
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