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Exchange rate volatility and investment: a panel data cointegration approach

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  • Diallo, Ibrahima Amadou

Abstract

This paper examines the link between the real exchange rate volatility and domestic investment by using the panel data cointegration techniques. In the first part of the paper, we study the theoretical link between the exchange rate, its volatility and the investment in a small open economy. The model shows that the effects of exchange rate volatility on investment are nonlinear. In the second part, we examine the empirical link between the exchange rate volatility and the investment. The results illustrate that the exchange rate volatility has a strong negative impact on investment. This outcome is robust in low income and middle income countries, and by using an alternative measurement of exchange rate volatility

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5364.

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Date of creation: Apr 2007
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Handle: RePEc:pra:mprapa:5364

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Keywords: Exchange rate volatility; Investment; Appreciation; Depreciation; Panel data cointegration; Dynamic Optimization; Capital goods; Expectations;

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  1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Darby, Julia & Hughes Hallett, Andrew & Ireland, Jonathan & Piscitelli, Laura, 1998. "The Impact of Exchange Rate Uncertainty on the Level of Investment," CEPR Discussion Papers 1896, C.E.P.R. Discussion Papers.
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  15. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY & Jean-Fran├žois BRUN, 1997. "How Instability Lowers African Growth ?," Working Papers 199712, CERDI.
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