Volatility and the Investment Response

18 Pages Posted: 11 Jun 2000 Last revised: 29 May 2008

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Nancy Peregrim Marion

Dartmouth College - Department of Economics

Date Written: November 1996


We use the World Bank decomposition of aggregate investment shares into their private and public components to test for the correlation between volatility and investment in a set of developing countries. We uncover a statistically significant negative correlation between various volatility measures and private investment, even when adding the standard control variables. No such correlation is uncovered when the investment measure is the sum of private and public investment spending. Indeed, public investment spending is positively correlated with some measures of volatility. We also use the new World Bank data to redo the Ramey and Ramey (1995) test for a correlation between investment and the standard deviation of innovations to a forecasting equation for growth. While Ramey and Ramey found no significant correlation using aggregate investment data, we find a negative and highly significant relationship between innovation volatility and private investment in developing countries. These findings suggest that the detrimental impact of volatility on investment may be difficult to detect using aggregate data.

Suggested Citation

Aizenman, Joshua and Marion, Nancy P., Volatility and the Investment Response (November 1996). NBER Working Paper No. w5841, Available at SSRN: https://ssrn.com/abstract=225627

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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