POLICY VARIABILITY AND ECONOMIC-GROWTH

This paper explores the effect of policy variability (or frequency of regime switching) on economic growth and welfare. We study a one-secto r growth model where investment can be subsidized at either a positive rate or not subsidized at all. We find that the lack of persistence i n policies per se need not be welfare reducing and that it is likely t o decrease growth. Higher variability implies more frequent changes in consumption and investment. But, by creating a stronger intertemporal link across regimes, variability reduces the fluctuation in investmen t rates, thus decreasing the magnitude of changes in consumption and i ncreasing welfare.