Policy Uncertainty, Persistence and Growth

46 Pages Posted: 19 Jul 2010

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Nancy Peregrim Marion

Dartmouth College - Department of Economics

Date Written: September 1991

Abstract

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.

Suggested Citation

Aizenman, Joshua and Marion, Nancy P., Policy Uncertainty, Persistence and Growth (September 1991). NBER Working Paper No. w3848, Available at SSRN: https://ssrn.com/abstract=1640418

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nancy P. Marion

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
(603) 646-2511 (Phone)

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