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Policy Variability in Models of Endogenous Growth with Productive Spending

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  • D Varvarigos

Abstract

Existing theoretical analyses have shown that if policy variables affect investmentdecisions in either physical or human capital then an increase in policy variability results in higher trend output growth as individuals respond to higher uncertainty with a precautionary increase in these types of investment. In this paper I present two models in which policy variability arises from randomness in the provision of productive spending. In the first model, public spending enters as an input in the production technology of the economy. In this case I find that the sign of the policy variability-growth relationship depends critically on the technological parameters of the production function. In the second model, public spending is an input on the education sector of the economy. In this case I find that policy variability is always growth retarding as individuals respond to increased uncertainty by actually reducing rather than increasing their investment in human capital.

Suggested Citation

  • D Varvarigos, 2005. "Policy Variability in Models of Endogenous Growth with Productive Spending," Centre for Growth and Business Cycle Research Discussion Paper Series 49, Economics, The University of Manchester.
  • Handle: RePEc:man:cgbcrp:49
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr49.pdf
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    References listed on IDEAS

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    1. Blackburn, Keith & Pelloni, Alessandra, 2004. "On the relationship between growth and volatility," Economics Letters, Elsevier, vol. 83(1), pages 123-127, April.
    2. Gomme, Paul, 1993. "Money and growth revisited : Measuring the costs of inflation in an endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 51-77, August.
    3. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-834, August.
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    Cited by:

    1. Vatcharin Sirimaneetham, 2006. "Explaining policy volatility in developing countries," Bristol Economics Discussion Papers 06/583, School of Economics, University of Bristol, UK.

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