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Understanding the investment cycle in adjustment programs : evidence from reforming economies

  • Solimano, Andres
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    The author reviews recent literature on capital formation and economic reform and looks at the cycle of private investment that occurs during adjustment. He identifies three phases in the response of private investment to adjustment programs: initial contraction, a long pause, and sustained recovery. The empirical evidence from Chile, Mexico, and Thailand shows that the initial contraction lasts from one to two years and the pause for three to five years. Moreover, the length of the investment pause is longer for low-income countries such as Bolivia and Ghana. Also, the cycle of public investment is of greater amplitude than the cycle of private investment. In characterizing the cycles of investment, the author assesses the role of such factors as demand restraint, currency depreciation, the value of waiting, credibility failures, and the lack of supportive infrastructure.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 912.

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    Date of creation: 31 May 1992
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    Handle: RePEc:wbk:wbrwps:912
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