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Investment and Exchange Rate Under Uncertainty

Author

Listed:
  • 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.

Suggested Citation

  • Vincenzo Atella & Gianfranco Enrico Atzeni & Pier Luigi Belvisi, 2003. "Investment and Exchange Rate Under Uncertainty," CEIS Research Paper 32, Tor Vergata University, CEIS.
    • Handle: RePEc:rtv:ceisrp:32
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    References listed on IDEAS

    as
    1. Campa, Jose Manuel & Goldberg, Linda S, 1999. "Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 287-314, May.
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    6. 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.
    7. Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-588, November.
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    9. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

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    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 Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 12(2), pages 187-213.
    4. Bakari, Sayef, 2022. "The Nexus between Domestic Investment and Economic Growth in Developed Countries: Do Exports matter?," MPRA Paper 114394, University Library of Munich, Germany.
    5. Ibrahima Amadou DIALLO, 2015. "Exchange Rate Volatility and Investment: A Panel Data Cointegration Approach," Expert Journal of Economics, Sprint Investify, vol. 3(2), pages 127-135.
    6. Aytekin GÜVEN & Arzu AKKOYUNLU-WIGLEY, 2018. "The Effects of Market Structure on Uncertainty-Investment Relationship: Evidence from Turkish Manufacturing Industry," Sosyoekonomi Journal, Sosyoekonomi Society, issue 26(37).
    7. 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.
    8. Carolina Troncoso Baltar & Celio Hiratuka & Gilberto Tadeu Lima, 2014. "Investment in the Brazilian manufacturing industry and the real exchange rate: An investigation using sectoral-level panel data," Competence Centre on Money, Trade, Finance and Development 1408, Hochschule fuer Technik und Wirtschaft, Berlin.
    9. Chien-Jen Wang & Po-Chin Wu & Yu-Ming Lu, 2011. "Twin-Rate Uncertainty, Debt And Investment Decisions– Evidence From Dow Jones Panel Data," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 5(1), pages 15-26.
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    11. 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.

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    More about this item

    Keywords

    exchange rate; firm heterogeneity; investment; uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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