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Policy Uncertainty, Persistence and Growth

  • Joshua Aizenman
  • Nancy Marion

This paper explores links between policy uncertainty and growth. It provides evidence on the correlation between policy uncertainty and per capita real GDP for 46 developing countries over the 1970-85 period. Cross-section regressions on growth suggest that after accounting for standard variables from the endogenous growth literature, policy uncertainty and growth are correlated. The importance of the correlation and even its sign depend on the particular policy and on the geographical region examined. One channel through which policy uncertainty may affect growth is the investment channel. Using an endogenous growth model where domestic investment is characterized by irreversibilities and policy fluctuates between a high and lowtax regime, we show that the gap between the two regimes and the persistence of a regime jointly determine the pattern of investment and growth. Policy uncertainty in the absence of persistence does not affect long run growth.

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File URL: http://www.nber.org/papers/w3848.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3848.

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Date of creation: Sep 1991
Date of revision:
Publication status: published as Review of International Economics, June 1993
Handle: RePEc:nbr:nberwo:3848
Note: ITI IFM
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  1. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  3. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  4. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
  5. 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 221-47, February.
  6. 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, vol. 27(1-2), pages 41-55, October.
  7. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
  8. 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 865-83, November.
  9. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  10. Sebastian Edwards & Guido Tabellini, 1990. "Explaining Fiscal Policies and Inflation in Developing Countries," NBER Working Papers 3493, National Bureau of Economic Research, Inc.
  11. Stern, Nicholas, 1989. "The Economics of Development: A Survey," Economic Journal, Royal Economic Society, vol. 99(397), pages 597-685, September.
  12. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
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