Investment, Macroeconomic Stability and Growth: The Latin American Experience

Abstract

The purpose of this paper is to explore the role of factor accumulation, economic policies, and economic and political uncertainties on growth performance of Latin American countries in the last three decades. We extend the work of Corbo and Rojas (1992) in two directions suggested by recent work in this area. First, we extend the model by considering terms of trade effects and an additional measure of distortion, the black market premium. Second, we provide further evidence of the channels through which economic policies affect growth by endogenizing the investment rate. The main conclusions are that the terms of trade affect growth directly, and indirectly through its effect in the investment rate; the black market premium is more a measure of macroeconomic instability than of the degree of oppenness; and stability of economic policies can affect growth directly through the law of motion for growth and indirectly through investment rates.