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Investment and the exchange rate: Short run and long run aggregate and sector-level estimates

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  • Landon, Stuart
  • Smith, Constance

Abstract

Aggregate and sector-level investment equations that incorporate the exchange rate are estimated for a panel of 17 OECD countries using an error correction methodology. A real currency depreciation is found to have a significant negative effect on aggregate investment in both the short run and the long run. This effect is negative in all sectors in the short run, is significant in six of nine sectors, and is particularly persistent in service sectors, sectors that do not generally benefit directly from an expansion of demand following a currency depreciation. Movements in another explanatory variable, the real wage, have an insignificant impact on investment in the short run in most sectors, but a rise in the real wage has a significant negative long run effect on aggregate investment and on investment in six of nine sectors. A simulation shows that movements in the real exchange rate and the real wage can explain a large proportion of cross-country differences in investment.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9958.

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Date of creation: Aug 2007
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Handle: RePEc:pra:mprapa:9958

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Keywords: investment; exchange rate;

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Cited by:
  1. Prashanth Mahagaonkar & Rainer Schweickert & Aditya S. Chavali, 2009. "Sectoral R&D Intensity and Exchange Rate Volatility: A Panel Study for OECD Countries," Kiel Working Papers 1531, Kiel Institute for the World Economy.
  2. DAVTYAN Azat, 2014. "Gmm Estimation And Shapiro-Francia Normality Test: A Case Study Of Developing Countries," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 9(1), pages 43-58, April.
  3. Asongu Simplice, 2012. "Linkages between Investment Flows and Financial Development: Causality Evidence from Selected African Countries," Working Papers 12/029, African Governance and Development Institute..

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