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PRIVATE INVESTMENT BEHAVIOR has been studied in detail, but the focus has almost exclusively been on industrial countries. Clearly it is equally important for policymakers in developing countries to be able to assess how private investment responds to changes in government policy-not only in designing long-term development strategies, but also in implementing shorter-term stabilization programs. Even if it can be assumed that an increase in private investment, other things being equal, has an unambiguous positive effect on output, it is still necessary to establish how private investment in developing countries is determined-in particular, what variables systematically affect it-before one can evaluate the influence that government can exercise over private investment decisions that change the current and future growth rate of the economy.1 The interaction between government policy and private investment is also crucial for any analysis of the effects that a stabilization program involving elements of demand restraint may have on the real sector-a question that is still the subject of considerable controversy (see, for example, Knight (1981, 1982)).

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