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Exchange Rate Flexibility, Volatility, and Domestic and Foreign Direct Investment

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  • Joshua Aizenman

    (International Monetary Fund)

Abstract

The 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 Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 39 (1992)
Issue (Month): 4 (December)
Pages: 890-922

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Handle: RePEc:pal:imfstp:v:39:y:1992:i:4:p:890-922

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Cited by:
  1. 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.
  2. Sandy Kyaw, 2006. "Foreign Direct Investment to Developing Countries in the Globalised World," Working Papers id:758, eSocialSciences.
  3. Hommel, Ulrich, 2003. "Financial versus operative hedging of currency risk," Global Finance Journal, Elsevier, vol. 14(1), pages 1-18, May.
  4. 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.
  5. Hjalmar Böhm & Michael Funke, 2001. "Does the Nominal Exchange Rate Regime Matter for Investment?," Quantitative Macroeconomics Working Papers 20105, Hamburg University, Department of Economics.

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