We uncover a significant negative correlation between various volatility measures and private investment in developing countries, 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. These findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data. We provide several possible interpretations for our findings. Nonlinearities in preferences or budget constraints can cause volatility to have first-order negative effects on private investment.

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This paper explores links between policy uncertainty and growth. Using an endogenous growth model in which domestic investment is characterized by irreversibilities and policy fluctuates between a high‐ and a low‐tax regime, it shows that the magnitude of policy fluctuation and the persistence of policy jointly determine the pattern of investment and growth. Cross‐section regressions confirm that for 46 developing countries over the 1970‐85 period, policy uncertainty is negatively correlated with both investment and growth. Policy persistence also plays an important role.

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The authors wish to thank Willem Buiter, Dale Henderson, and David Lipton for helpful comments. The research reported here is part of the NBER's research program in International Studies. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research.

This paper is a theoretical and empirical investigation into the duration of exchange-rate pegs. The theoretical model considers a policy-maker who must trade off the economic costs of real exchange-rate misalignment against the political cost of realignment. The optimal time to spend on a peg is derived and factors that influence peg duration are identified. The predictions of the model are tested using logit analysis with a data set of exchange-rate pegs for sixteen Latin American counu-ics and Jamaica during the 1957-199 1 period. We find that the real exchange rate is a significant detemiinant of the likelihood of a devaluation. Structural variables, such as the openness of the economy and its geographical trade concenhation, also significantly affect the likelihood of a devaluation. Finally, political events that change the political cost of realignment, such as regular and inegular executive transfers, are empirically important detemiinants of the likelihood of a devaluation.

This paper is a theoretical and empirical investigation into the duration of exchange-rate pegs. The theoretical model considers a policy-maker who must trade off the economic costs of real exchange-rate misalignment against the political cost of realignment. The optimal time to spend on a peg is derived and factors that influence peg duration are identified. The predictions of the model are tested using logit analysis with a data set of exchange-rate pegs for sixteen Latin American counu-ics and Jamaica during the 1957-199 1 period. We find that the real exchange rate is a significant detemiinant of the likelihood of a devaluation. Structural variables, such as the openness of the economy and its geographical trade concenhation, also significantly affect the likelihood of a devaluation. Finally, political events that change the political cost of realignment, such as regular and inegular executive transfers, are empirically important detemiinants of the likelihood of a devaluation.