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Policy Uncertainty and Long-Run Investment and Output across Countries

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  • Byeongju Jeong

    (CERGE-EI)

Abstract

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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File URL: http://128.118.178.162/eps/game/papers/0012/0012006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0012006.

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Length: 39 pages
Date of creation: 23 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpga:0012006

Note: Type of Document - Acrobat PDF; pages: 39 ; figures: included
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Web page: http://128.118.178.162

Related research

Keywords: Policy uncertainty; Capital price; Investment; Output; Cross- countrycomparison;

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Cited by:
  1. Wang, Yizhong & Chen, Carl R. & Huang, Ying Sophie, 2014. "Economic policy uncertainty and corporate investment: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 227-243.
  2. 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.
  3. Vatcharin Sirimaneetham, 2006. "Explaining policy volatility in developing countries," Bristol Economics Discussion Papers 06/583, Department of Economics, University of Bristol, UK.
  4. Malik, Adeel & Temple, Jonathan, 2006. "The Geography of Output Volatility," CEPR Discussion Papers 5516, C.E.P.R. Discussion Papers.
  5. Amber Fatima & Abdul Waheed, 2014. "Economic uncertainty and growth performance: a macroeconomic modeling analysis for Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(3), pages 1361-1387, May.

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