Abstract This paper explores links between policy uncertainty and growth. Using an endogenous growth model in which domestic investment is characterized by irreversibilities and policy fluctuates between a high‐ and a low‐tax regime, it shows that the magnitude of policy fluctuation and the persistence of policy jointly determine the pattern of investment and growth. Cross‐section regressions confirm that for 46 developing countries over the 1970‐85 period, policy uncertainty is negatively correlated with both investment and growth. Policy persistence also plays an important role.
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