Policy Uncertainty and Long-Run Investment and Output across Countries

Byeongju Jeong

Game Theory and Information from University Library of Munich, Germany

Abstract: I explore how and and to what extent policy uncertainty can account for the observed long-run cross-country differences in capital price and levels of aggregate investment and output. I present a model economy where the industry-level policy-related investment cost is uncertain. Holding the average one-period investment cost constant, policy uncertainty leads to a higher capital price and subsequently to lower levels of long-run aggregate investment and output. Policy uncertainty also makes industry-level investment more volatile. In an investigation of industry-level investment across countries, I find that, consistent with the model, industry-level investment in lower-income countries is more volatile. I calibrate the model so that the simulated investment sequences from the model mimic the actual investment sequences. I find that policy uncertainty can account for large differences in long-run capital price, investment, and output across countries. Between the lowest-income and the highest-income countries, policy uncertainty can account for the capital price difference by a factor of about three, and can account for investment and output level differences of a similar magnitude.

Keywords: Policy uncertainty; Capital price; Investment; Output; Cross- countrycomparison (search for similar items in EconPapers)
JEL-codes: D81 E22 O40 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2001-02-23
Note: Type of Document - Acrobat PDF; pages: 39 ; figures: included
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Citations: View citations in EconPapers (4)

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Journal Article: Policy Uncertainty and Long-Run Investment and Output across Countries (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpga:0012006

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