Policy Reform, Adjustment Costs, and Investment

Download or read book Policy Reform, Adjustment Costs, and Investment written by Mr.Omotunde E. G. Johnson and published by International Monetary Fund. This book was released on 1997-11-01 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.