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Investment and Instability

Author

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  • Nauro F. Campos

    (CERGE-EI)

  • Jeffrey B. Nugent

    (University of Southern California)

Abstract

Although recet research has repeatedly found a negative association between investment and socio-political instability (SPI), the existence and direction of causality between these two variables has not yet been investigated. We construct an index of SPI for non-overlaping five-years periods between 1960 and 1995 for a sample of 98 developing countries. We use the Granger causality framework and report Anderson-Hsiao- Arellano instrumental variable estimates. Our main finding is that, for the full sample, there is a robust causal relationship going from SPI to investment, and it is positive. In other words, we find three reasons may explain this result: one is that SPI delays investment, another is that it destroys at least part of the capital stock, and the third is that SPI causes changes in government and in government policies that are benefical in the long run.

Suggested Citation

  • Nauro F. Campos & Jeffrey B. Nugent, 2001. "Investment and Instability," Development and Comp Systems 0012015, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpdc:0012015
    Note: Type of Document - Acrobat PDF; pages: 19 ; figures: included
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    4. Buch, Claudia M. & Doepke, Joerg & Pierdzioch, Christian, 2005. "Financial openness and business cycle volatility," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 744-765, September.

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    More about this item

    Keywords

    Political instability; Aggregate investment; Granger causality;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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