Policy Uncertainty and Long-Run Investment and Output across Countries
AbstractI 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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Bibliographic InfoPaper provided by EconWPA in its series Game Theory and Information with number 0012006.
Length: 39 pages
Date of creation: 23 Feb 2001
Date of revision:
Note: Type of Document - Acrobat PDF; pages: 39 ; figures: included
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Policy uncertainty; Capital price; Investment; Output; Cross- countrycomparison;
Other versions of this item:
- Byeongju Jeong, 2002. "Policy Uncertainty and Long-Run Investment and Output across Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 363-392, May.
- 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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- Malik, Adeel & Temple, Jonathan, 2006.
"The Geography of Output Volatility,"
CEPR Discussion Papers
5516, C.E.P.R. Discussion Papers.
- Adeel Malik & Jonathan R W Temple, 2005. "The Geography of Output Volatility," CSAE Working Paper Series 2005-07, Centre for the Study of African Economies, University of Oxford.
- Adeel Malik & Jonathan R.W. Temple, 2005. "The Geography of Output Volatility," Economics Series Working Papers WPS/2005-07, University of Oxford, Department of Economics.
- Vatcharin Sirimaneetham, 2006. "Explaining policy volatility in developing countries," Bristol Economics Discussion Papers 06/583, Department of Economics, University of Bristol, UK.
- 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.
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