NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Volatility and the Investment Response

Joshua Aizenman, Nancy P. Marion

NBER Working Paper No. 5841
Issued in November 1996
NBER Program(s):   ITI

We use the World Bank decomposition of aggregate investment shares into their private and public components to test for the correlation between volatility and investment in a set of developing countries. We uncover a statistically significant negative correlation between various volatility measures and private investment, 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. We also use the new World Bank data to redo the Ramey and Ramey (1995) test for a correlation between investment and the standard deviation of innovations to a forecasting equation for growth. While Ramey and Ramey found no significant correlation using aggregate investment data, we find a negative and highly significant relationship between innovation volatility and private investment in developing countries. These findings suggest that the detrimental impact of volatility on investment may be difficult to detect using aggregate data.

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Document Object Identifier (DOI): 10.3386/w5841

Published: (Published as "Volatility and Investment") Economica, Vol. 66 (1999): 157-179.

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