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Panel Estimation of the Impact of Exchange Rate Uncertainty on Investment in the Major Industrial Countries

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Joseph P. Byrne ()
E. Philip Davis ()

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Abstract

We estimate the impact of exchange rate uncertainty on investment, using panel estimation featuring a decomposition of exchange rate volatility derived from the components GARCH model of Engle and Lee (1999). For a poolable subsample of EU countries, it is the transitory and not the permanent component of volatility which adversely affects investment, implying high frequency shocks of the type that may be generated by volatile short term capital flows are most deleterious for investment. Results based on EGARCH also suggest that the response of investment to exchange rate uncertainty may depend partly on the sign of the initial shock.

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Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 208.

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Date of creation: Feb 2003
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Handle: RePEc:nsr:niesrd:208

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