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Credibility, Irreversibility of Investment, and Liberalization Reforms in LDCs: A Note


  • Andrea Bassanini

    () (OECD, Economics Department)


Empirical evidence of the impact of policy uncertainty on aggregate investment is mixed. However, if the relationship between policy uncertainty and investment performance is non-linear, linear regression exercises might not capture the effect of policy uncertainty. In this short paper, I present a simple model with investment irreversibility which shows that, in the presence of legal constraints on investment in foreign assets, domestic real investment performance is poorer when trade reforms are only partially incredible.

Suggested Citation

  • Andrea Bassanini, 2005. "Credibility, Irreversibility of Investment, and Liberalization Reforms in LDCs: A Note," Documents de recherche 05-17, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:05-17

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    Credibility; Trade Reforms; Investment Irreversibility; Capital Flight; Investment Performance;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development


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