Policy Reform, Adjustment Costs, and Investment : With Activity of Local Investors as a Signal

Author/Editor:

Omotunde E. G. Johnson

Publication Date:

November 1, 1997

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Adjustment assistance is provided to local investors responding to policy reform and facing adjustment costs, to facilitate their activity–a signal to foreign investors about the profitability of investing in the local economy. The government, in providing assistance, maximizes its utility subject to its budgetary constraint, taking into account the utility forgone in alternative uses of budgetary funds. Foreign investors use the signal to update beliefs about investors in the local economy and compute the expected return from investing in the country. The investment response of foreign investors depends on the expected return so computed relative to the expected returns in their alternative investments worldwide.

Series:

Working Paper No. 97/148

Subject:

English

Publication Date:

November 1, 1997

ISBN/ISSN:

9781451856781/1018-5941

Stock No:

WPIEA1481997

Format:

Paper

Pages:

21

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