I explore how and and to what extent policy uncertainty can account for the observed long-run cross-country differences in capital price and levels of aggregate investment and output. I present a model economy where the industry-level policy-related investment cost is uncertain. Holding the average one-period investment cost constant, policy uncertainty leads to a higher capital price and subsequently to lower levels of long-run aggregate investment and output. Policy uncertainty also makes industry-level investment more volatile. In an investigation of industry-level investment across countries, I find that, consistent with the model, industry-level investment in lower-income countries is more volatile. I calibrate the model so that the simulated investment sequences from the model mimic the actual investment sequences. I find that policy uncertainty can account for large differences in long-run capital price, investment, and output across countries. Between the lowest-income and the highest-income countries, policy uncertainty can account for the capital price difference by a factor of about three, and can account for investment and output level differences of a similar magnitude.
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Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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