The effects of an adverse change in market sentiment, defined as a temporary increase in the premium faced by domestic borrowers on world financial markets, are studied in an intertemporal optimizing framework with imperfect capital mobility. Firms' demands for working capital are financed by...

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...