Journal Article

Policy Variability and Economic Growth

Hugo A. Hopenhayn and María E. Muniagurria

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 63, issue 4, pages 611-625
Published in print October 1996 | ISSN: 0034-6527
e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.2307/2297796
Policy Variability and Economic Growth

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This paper explores the effect of policy variability (or frequency of regime switching) on economic growth and welfare. We study a one-sector growth model where investment can be subsidized at either a positive rate or not subsidized at all. We find that the lack of persistence in policies per se need not be welfare reducing and that it is likely to decrease growth. Higher variability implies more frequent changes in consumption and investment. But, by creating a stronger intertemporal link across regimes, variability reduces the fluctuation in investment rates, thus decreasing the magnitude of changes in consumption and increasing welfare.

Journal Article.  0 words. 

Subjects: Economics

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