Real Exchange Rates, Economic Complexity, and Investment (original) (raw)
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Investment and the exchange rate: An analysis with firm-level panel data
European Economic Review, 2001
This paper investigates the relationship between exchange rate fluctuations and the investment decisions of a sample of Italian manufacturing firms. The results support the view that a depreciation of the exchange rate has a positive effect on investment through the revenue channel, and a negative effect through the cost channel. The magnitude of these effects varies over time with changes in the firm's external orientation, as measured by the share of foreign sales over total sales and the reliance on imported inputs. Consistent with the predictions of our theoretical framework, the effect of exchange rate fluctuations on investment is stronger for firms with low monopoly power, facing a high degree of import penetration in the domestic market, and of a small size. We also provide evidence that the degree of substitutability between domestically produced and imported inputs influences the effect through the expenditure side.
Investment and the exchange rate: Short run and long run aggregate and sector-level estimates
Journal of International Money and Finance, 2009
Aggregate and sector-level investment equations that incorporate the exchange rate are estimated for a panel of 17 OECD countries using an error correction methodology. A real currency depreciation is found to have a significant negative effect on aggregate investment in both the short run and the long run. This effect is negative in all sectors in the short run, is significant in six of nine sectors, and is particularly persistent in service sectors, sectors that do not generally benefit directly from an expansion of demand following a currency depreciation. Movements in another explanatory variable, the real wage, have an insignificant impact on investment in the short run in most sectors, but a rise in the real wage has a significant negative long run effect on aggregate investment and on investment in six of nine sectors. A simulation shows that movements in the real exchange rate and the real wage can explain a large proportion of crosscountry differences in investment. JEL Classification: F3, F4, E22
The relationship between investment and large exchange rate depreciations in dollarized economies
We use a simple financial friction in an economy with high degree of liability dollarization to show that the negative balance-sheet effect of an exchange rate depreciation may be observable only if the magnitude of the depreciation is large enough. This result justifies the difficulty to find strong empirical evidence for balancesheet effects and suggests the convenience of including a "large depreciation" term in empirical analyses.
International Journal of Finance & Economics, 2018
We examine how movements in the real exchange rate impact private domestic investment. Importantly, we consider whether investment responds differently to real depreciations versus real appreciations. Using a sample of 6 emerging markets over 1980 to 2014, we show that considering asymmetric responses provides an important contribution to this literature. Previous mixed results that assume symmetric responses may be better explained by considering such asymmetric effects.
Investment and exchange rate uncertainty
Journal of Policy Modeling, 2003
The literature on the relationship between exchange rate and investment mainly focuses on the devaluation argument, which provides evidence that a devaluation may positively affect investment spending. The goal of this paper is to extend the analysis to how exchange rate variability can influence firm innovation process. Employing a large panel of Italian firms and using a model of signal extraction we find that exchange rate volatility reduces investment, with a decreasing sensitivity the greater the firm market power. A stable exchange rate is then an incentive to invest as it allows a more reliable estimation of its marginal productivity. To this extent, any economic system may benefit from a stable exchange rate in terms of investment and profit, provided it is able to strengthen its firm market power.
Exchange rate uncertainty and business sector investment
Contributed Paper, 2000
Conventional wisdom among policy makers suggests that increasing price or exchange rate variability would depress investment. Using the Dixit-Pindyck option value model, this paper argues that exchange rate variations should be split into their misalignments and prove volatility components. We can then show theoretically that there are cases where an undervaluation will increase investment expenditures, and that there are cases where those expenditures would be reduced. Similarly overvaluations may increase or decrease investment depending on certain conditions which will be industry (or economy) specific. However the important general results are: i) the persistence of a misalignment matters; ii) not allowing for separate volatility and misalignment effects results in misspecification; iii) misalignment effects may be asymmetric, in that they may differ depending on their sign; and iv) their impacts are nonlinear. This provides some communality, but beyond that misalignments/volatility have different effects in different places, depending on the industry or industrial structure. We show this on a sample of data from 4 leading OECD economies in terms of the relevant elasticities.
The impact of exchange rate uncertainty on the level of investment
The Economic …, 1999
Conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment. Using the Dixit±Pindyck model, we ®nd that there are situations where this will happen; and situations where it does not. There are threshold effects which allows us to identify when rising volatility would increase or decrease investment; and also to identify which types of industries would gain, and which would suffer, from a move to ®xed exchange rates. This is important for monetary union in Europe since it is likely that, even if trade is insensitive to exchange rate volatility, investment with its longer horizon will be affected.
International Journal of Business and Society, 2019
This study analyzes the response of corporate investment to exchange rate movements in five ASEAN (ASEAN-5) countries. A theoretical framework is proposed for the real exchange rate, which affects corporate activities through at least three channels: revenue (exports), imported inputs, and imported finished goods. Estimations using dynamic panel data based on quarterly data (2001Q1–2014Q4) from 859 manufacturing corporations support the hypotheses. The results support the revenue channel for manufacturing in Indonesia, Malaysia, and the Philippines. Hence, depreciation is expected to increases sales, leading to increased corporate investment. The revenue channel in Singaporean manufacturing was significant after separating the penetration of low imported finished goods from that of high. Because exporter companies are also simultaneously big importers of inputs, the imported inputs channel generally increases corporate investment. In addition, the additional cost of imported inputs remains smaller than the additional gain from exports. The imported finished-goods channels demonstrate that the less imported finished-goods penetration the greater the impact of currency value on corporate investment. Research on investments and exchange rates is rare in the Southeast Asian context. Therefore, this paper contributes to the literature by analyzing the transmission mechanism of the impact of exchange rate movements on corporate investments. Keywords: Corporate investment; Dynamic panel data; International orientation; Real exchange rate.
The Effects of Real Exchange Rate Volatility on Sectoral Investment
The Effects of Real Exchange Rate Volatility on Sectoral Investment
The aim of this paper is to analyse empirically the effects of real exchange rate volatility on sectoral exports in Turkey under intermediate and flexible exchange rate regimes. The cointegration test and error correction models are used to test the long-run relationship and short-run effects, respectively. The estimation results show that the real exchange rate volatility has negative and significant effects on sectoral exports in both intermediate and flexible exchange rate regimes. These empirical results are consistent with the theory. However, the impact of real exchange rate and foreign income appeared to be quite different for the two exchange rate regimes. Further, research is required to analyse the impacts of real exchange rate and foreign income on sectoral exports.
Investment and the Exchange Rate
1998
This paper investigates the relationship between exchange rate fluctuations and the investment decisions of a sample of Italian manufacturing firms. The results support the view that a depreciation of the exchange rate has a positive effect on investment through the revenue channel, and a negative effect through the cost channel.