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Does the Nominal Exchange Rate Regime Matter for Investment?

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  • Hjalmar Böhm
  • Michael Funke

Abstract

This paper analyses the impact of exchange rate uncertainty upon the pattern of investment in different exchange rate regimes (very hard pegs, intermediate regimes, and floats) by means of a unified approach. The comparison of different exchange rate regimes indicates that currency volatility exerts only a small influence upon the level of investment spending. On the other hand, firms turn out to be more cautious about responding to exchange rate shocks in a credible target zone model than in a flexible exchange rate regime or in a target zone model with stochastic realignments.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 578.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_578

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Keywords: investment; uncertainty; irreversibility; exchange rate regimes;

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References

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  1. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies, Board of Governors of the Federal Reserve System (U.S.) 57, Board of Governors of the Federal Reserve System (U.S.).
  2. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
  3. Caballero, R. & Engel, E.M.R.A., 1991. "Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy," Discussion Papers, Columbia University, Department of Economics 1991_16, Columbia University, Department of Economics.
  4. Lars E.O. Svensson, 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," NBER Working Papers 3466, National Bureau of Economic Research, Inc.
  5. Bodnar, Gordon M. & Gebhardt, Günther, 1998. "Derivatives usage in risk management by U.S. and German non-financial firms: A comparative survey," CFS Working Paper Series, Center for Financial Studies (CFS) 1998/17, Center for Financial Studies (CFS).
  6. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 228-33, March.
  7. Andrew K. Rose, 1994. "Exchange Rate Volatility, Monetary Policy, and Capital Mobility: Empirical Evidence on the Holy Trinity," NBER Working Papers 4630, National Bureau of Economic Research, Inc.
  8. Andrew B. Abel & Avinash Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 753-77, August.
  9. Froot, Kenneth & Obstfeld, Maurice, 1991. "Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 522, C.E.P.R. Discussion Papers.
  10. Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-88, November.
  11. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 117-214, January.
  12. Michael D. Bordo & Anna J. Schwartz, 1997. "Monetary Policy Regimes and Economic Performance: The Historical Record," NBER Working Papers 6201, National Bureau of Economic Research, Inc.
  13. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 669-82, August.
  14. Joshua Aizenman, 1992. "Exchange Rate Flexibility, Volatility, and Domestic and Foreign Direct Investment," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 890-922, December.
  15. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 620-38, June.
  16. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 205-28, May.
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Cited by:
  1. DeLisle Worrell, 2003. "A Currency Union for the Caribbean," IMF Working Papers, International Monetary Fund 03/35, International Monetary Fund.
  2. Bailliu, Jeannine & Lafrance, Robert & Perrault, Jean-Francois, 2003. "Does Exchange Rate Policy Matter for Growth?," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(3), pages 381-414, Winter.
  3. Yu-Fu Chen & Michael Funke, 2002. "Exchange Rate Uncertainty and Labour Market Adjustment under Fixed and Flexible Exchange Rates," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 20202, Hamburg University, Department of Economics.
  4. Petreski, Marjan, 2009. "Exchange-rate regime and economic growth: a review of the theoretical and empirical literature," Economics Discussion Papers, Kiel Institute for the World Economy 2009-31, Kiel Institute for the World Economy.
  5. Petreski, Marjan, 2009. "Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data," Economics Discussion Papers, Kiel Institute for the World Economy 2009-49, Kiel Institute for the World Economy.

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