Policy Variability, Productive Spending and Growth

In this paper I present two models with policy variability arising from randomness in the provision of productive public spending. In the first model, public spending enters as an input in output production. In this case I find that the relationship between policy variability and growth depends critically on the technological parameters of the production function. In the second model, public spending enters as an input in the education sector of the economy. In this case I find that policy variability retards growth as individuals respond to increased uncertainty by actually reducing rather than increasing their investment in human capital. Copyright (c) The London School of Economics and Political Science 2006.