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On Consumption, Investment and Risk

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  • Francisco Venegas-Martínez

    () (División de Economía, Centro de Investigación y Docencia Económicas, A. C. (CIDE). México, D.F. Mexico)

Abstract

The Mexican episode of 1992-1994 was characterized by a steep rise in consumption accompanied by a sharp fall in investment. This paper provides an explanation of the negative response of investment to political risk, as occurred in Mexico between 1992 and 1994. It is assumed that, inside an adjustable band, the expected rate of depreciation is driven by a mixed diffusion-jump process and the expected real rate of return on an international bond is governed by a diffusion process, both processes being correlated. This paper analyzes a small open stochastic economy. Two cases are considered: i) a cash-in-advance, Ramsey-type economy, and ii) a Sidrauski-type economy.

Suggested Citation

  • Francisco Venegas-Martínez, 2000. "On Consumption, Investment and Risk," Economía Mexicana NUEVA ÉPOCA, , vol. 0(2), pages 227-244, July-Dece.
  • Handle: RePEc:emc:ecomex:v:9:y:2000:i:2:p:227-244
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