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Investment and Exchange Rate Under Uncertainty

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  • Vincenzo Atella

    ()
    (University of Rome II - Faculty of Economics)

  • Gianfranco Enrico Atzeni

    ()
    (University of Sassari - Dip.to di Economia Impresa e Regolamentazione)

  • Pier Luigi Belvisi

    ()
    (Universitˆ degli Studi di Roma Tor Vergata - Faculty of Law)

Abstract

The literature on the relationship between exchange rate and investment mainly focuses on the devaluation argument, which provides evidence that a devaluation may positively affect investment spending. The goal of this paper is to extend the analysis to how exchange rate variability can influence firm innovation process. Employing a large panel of Italian firms and using a model of signal extraction we find that exchange rate volatility reduces investment, with a decreasing sensitivity the greater the firm market power. A stable exchange rate is then an incentive to invest as it allows a more reliable estimation of its marginal productivity. To this extent, any economic system may benefit from a stable exchange rate in terms of investment and profit, provided it is able to strengthen its firm market power.

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File URL: ftp://www.ceistorvergata.it/repec/rpaper/No-32-Atella,Atzeni,Belvisi.pdf
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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 32.

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Length: 16
Date of creation: 01 Aug 2003
Date of revision:
Handle: RePEc:rtv:ceisrp:32

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Related research

Keywords: exchange rate; firm heterogeneity; investment; uncertainty;

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References

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  1. Jose Campa & Linda S. Goldberg, 1996. "Investment, pass-through, and exchange rates: a cross-country comparison," Staff Reports 14, Federal Reserve Bank of New York.
  2. Linda Goldberg & Joseph Tracy, 1999. "Exchange rates and local labor markets," Staff Reports 63, Federal Reserve Bank of New York.
  3. Julia Darby & Andrew Hughes Hallett & Jonathan Ireland & Laura Piscitelli, . "The Impact of Exchange Rate Uncertainty on the Level of Investment," ICMM Discussion Papers 49, Department of Economics University of Strathclyde.
  4. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  5. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  6. 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.
  7. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
  8. Linda Goldberg & Joseph Tracy, 2001. "Exchange rates and wages," Staff Reports 116, Federal Reserve Bank of New York.
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Citations

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Cited by:
  1. Günçavdi, Öner & Küçük, Ali Erhan, 2013. "Investment expenditure and capital accumulation in an inflationary environment: The case of Turkey," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 554-571.
  2. Diallo, Ibrahima Amadou, 2007. "Exchange rate volatility and investment: a panel data cointegration approach," MPRA Paper 5364, University Library of Munich, Germany.
  3. Eliane Cristina de Araújo, 2011. "Volatilidade Cambial e Crescimento Econômico: Teorias e Evidências para Economias em Desenvolvimento e Emergentes (1980 e 2007)," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 12(2), pages 187_213.
  4. Landon, Stuart & Smith, Constance E., 2009. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 813-835, September.

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