Center for Economic Research, Department of Economics, University of Minnesota
I offer differences in uncertainty of the industry-level investment environment as an explanation
for the observed differences in the investment good price and output level across
countries. I present a model economy where the tax rate on industry investment follows
a stochastic process. In this environment, a higher level of uncertainty makes investment
more inefficient (i.e. increase the expected cost of producing unit of capital), and this is reflected
in higher investment good prices. An investigation of industry-level investment data
across countries shows that the patterns of investment dynamics (i.e features or statistics
of investment sequence) in relation to output level are consistent with the implication of the
model. I assign model parameter values to countries of different output levels so that the
simulated investment sequences from the model mimick the actual investment sequences.
I find that uncertainty can accout for all of the observed differences in the investment
good price, and a significant portion of the differences in the output level across countries.
Differences in uncertainty between the US and Ethiopia can account for difference in the
investment good price by factor of up to 4, and difference in the output level by factor of
up to 16 between the two countries.
Jeong, B., (1996), "How Important is Uncertainty in Accounting for Differences in Investment and Output Across Countries?", Discussion Paper No. 287, Center for Economic Research, Department of Economics, University of Minnesota.
How Important is Uncertainty in Accounting for Differences in Investment and Output Across Countries?.
Center for Economic Research, Department of Economics, University of Minnesota.
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