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Modeling investment behavior in developing countries : an application to Egypt

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  • Shafik, Nemat
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    Abstract

    The economic literature on investment has been characterized by considerable controversy, even by the standards of economists. A number of different, often overlapping, models of investment determination have been hypothesized and the empirical evidence has done little to clarify which, if any, are accurate representations of the way in which capital formation occurs in the economy. This paper suggests some methodological innovations in modelling aggregate investment behavior. A theoretical framework for analyzing investment decisions that takes into account some of the structural features of a developing economy is presented. Starting from the firm's optimization problem, an aggregate investment function is derived that reflects the results of a survey of decision-making in fifty private sector firms in Egypt. The model is then tested at the macroeconomic level using new econometric techniques that have emerged in the recent literature on stationarity testing and cointegration. The relationship between investment and an array of government policies is highlighted in the econometric analysis. The conclusions, both methodological and empirical, are also presented.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 452.

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    Date of creation: 30 Jun 1990
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    Handle: RePEc:wbk:wbrwps:452

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    Keywords: Economic Theory&Research; Environmental Economics&Policies; International Terrorism&Counterterrorism; Financial Intermediation; Trade and Regional Integration;

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    Cited by:
    1. Manoj Atolia, 2002. "Trade Liberalization and Rising Wage Inequality in Latin America: Reconciliation with HOS Theory," Working Papers, Department of Economics, Florida State University wp2002_03_01, Department of Economics, Florida State University, revised Feb 2006.

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