Volatility and Investment Selection in an Economic Growth Model
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Abstract
Macroeconomic volatility can affect long-term growth through its effects on aggregate savings and investment. In this article, an economic growth model is developed in which industries, based on macroeconomic volatility and credit restrictions in the financial sector, have the possibility of dividing their wealth into short-term investment versus long-term investment which contributes more to productivity growth. The model is empirically evaluated for Mexico using a dynamic partial adjustment econometric model.
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