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Policy Uncertainty, Persistence and Growth

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  • Aizenman, Joshua
  • Marion, Nancy P

Abstract

This paper explores links between policy uncertainty and growth. Using an endogenous growth model in which domestic investment is characterized by irreversibilities and policy fluctuates between a high- and a low-tax regime, it shows that the magnitude of policy fluctuation and the persistence of policy jointly determine the pattern of investment and growth. Cross-section regressions confirm that for 46 developing countries over the 1970-85 period, policy uncertainty is negatively correlated with both investment and growth. Policy persistence also plays an important role. Copyright 1993 by Blackwell Publishing Ltd.

Suggested Citation

  • Aizenman, Joshua & Marion, Nancy P, 1993. "Policy Uncertainty, Persistence and Growth," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 145-163, June.
  • Handle: RePEc:bla:reviec:v:1:y:1993:i:2:p:145-63
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, pages 229-242.
    3. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    4. Meir Kohn & Nancy Marion, 1992. "The Implications of Knowledge-Based Growth for the Optimality of Open Capital Markets," Canadian Journal of Economics, Canadian Economics Association, vol. 25(4), pages 865-883, November.
    5. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, pages 969-985.
    6. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, pages 229-242.
    7. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, pages 41-55.
    8. Edwards, Sebastian & Tabellini, Guido, 1991. "Explaining fiscal policies and inflation in developing countries," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages 16-48, March.
    9. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
    10. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, pages 969-985.
    11. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    12. Stern, Nicholas, 1989. "The Economics of Development: A Survey," Economic Journal, Royal Economic Society, vol. 99(397), pages 597-685, September.
    13. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
    14. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, pages 3-42.
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