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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. 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.
  2. Hjalmar Böhm & Michael Funke, 2001. "Does the Nominal Exchange Rate Regime Matter for Investment?," Quantitative Macroeconomics Working Papers 20105, Hamburg University, Department of Economics.
  3. Hommel, Ulrich, 2003. "Financial versus operative hedging of currency risk," Global Finance Journal, Elsevier, vol. 14(1), pages 1-18, May.
  4. 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.
  5. Sandy Kyaw, 2006. "Foreign Direct Investment to Developing Countries in the Globalised World," Working Papers id:758, eSocialSciences.
  6. 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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