Exchange Rate Flexibility, Volatility, and Domestic and Foreign Direct Investment
AbstractThe impact of exchange rate regimes on domestic and foreign investment in the presence of a short-run Phillips curve is investigated. Producers may diversify internationally to increase the flexibility of production, thereby diversifying country-specific productivity and monetary shocks. Aggregate investment is shown to be higher under a fixed exchange rate than under a flexible exchange rate for both productivity and monetary shocks. Welfare is not, however, necessarily higher under either regime: a flexible exchange rate stabilizes employment in the presence of real shocks at the cost of reduced expected GNP and investment.
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Bibliographic InfoArticle provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.
Volume (Year): 39 (1992)
Issue (Month): 4 (December)
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Web page: http://www.palgrave-journals.com/
Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
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- F15 - International Economics - - Trade - - - Economic Integration
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
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- Bahar Erdal, 2001. "Investment Decisions under Real Exchange Rate Uncertainty," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 1(1), pages 25-47.
- Hjalmar Böhm & Michael Funke, 2001.
"Does the Nominal Exchange Rate Regime Matter for Investment?,"
Quantitative Macroeconomics Working Papers
20105, Hamburg University, Department of Economics.
- Hjalmar Böhm & Michael Funke, 2001. "Does the Nominal Exchange Rate Regime Matter for Investment?," CESifo Working Paper Series 578, CESifo Group Munich.
- Hommel, Ulrich, 2003. "Financial versus operative hedging of currency risk," Global Finance Journal, Elsevier, vol. 14(1), pages 1-18, May.
- Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April.
- Sandy Kyaw, 2006. "Foreign Direct Investment to Developing Countries in the Globalised World," Working Papers id:758, eSocialSciences.
- Rajesh Chakrabarti & Barry Scholnick, 2002. "Exchange rate expectations and foreign direct investment flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 138(1), pages 1-21, March.
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