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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Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
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- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
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