Volatility and Investment: Interpreting Evidence from Developing Countries

The authors 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. The authors provide several possible interpretations for their findings. Nonlinearities in preferences or budget constraints can cause volatility to have first-order negative effects on private investment. Copyright 1999 by The London School of Economics and Political Science

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