This paper proposes a measure of the welfare cost of volatitliy derived from an endogenous growth model (AK) under uncertainty extended to the case of a recursive utility function which disentangles risk aversion from intertemporal elasticity of substitution. It encompasses a direct welfare cost of fluctuations and a welfare cost due to the endogeneity of the consumption. The total welfare cost of volatility increases with both the risk aversion and the intertemporal elasticity of substitution. For plausible values of the agent's preference parameters, the cost of volatility may be greater than measures bases on an exogenous process for consumption.
This paper presents new empirical evidence about the process of plant investment. Using newspaper and trade journal articles, the author collects and analyzes time-to-build data for a sample of Compustat firms. These data suggest that the average construction lead time for new plants is around two years in most industries. Business cycle fluctuations do not affect the length of time-to-build. The investment lead times are generally not sensitive to the size of the projects. Only nine percent of the firms in the sample deviate from their investment schedules and delay or abandon their projects.
Sustaining a high rate of economic growth is the major policy issue facing the Arab economies. A detailed analysis of growth, investment, and savings for the period 1971-96, including through a growth accounting exercise, shows that increasing long-run growth requires improvements in both investment and domestic savings. In the past, the Arab region’s growth was overly reliant on volatile external sources of funding, and total factor productivity growth was too low. The paper discusses the policy priorities to overcome the legacy of poor growth.