DP2609 Investment and Instability

Author(s): Nauro F. Campos, Jeffrey B Nugent
Publication Date: November 2000
Keyword(s): Aggregate Investment, Granger Causality, Political Instability
JEL(s): D72, E23, O40
Programme Areas: International Macroeconomics, Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2609

Although recent research has repeatedly found a negative association between investment and political instability, the existence and direction of causality between these two variables has not yet been investigated. This paper empirically tests for such a causal and negative long-run relationship between political instability and investment. It finds that there is a robust causal relationship from instability to investment, and that it is positive. In other words, an increase in political instability causes an increase in investment (Granger). We identify three different theories that can explain this result.