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Investment and Exchange Rate Under Uncertainty

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Author Info

  • 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

    () (UniversitĖ† 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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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
Phone: +390672595601
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Web page: http://www.ceistorvergata.it
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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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Web: http://www.ceistorvergata.it

Related research

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

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References

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  1. Campa, Jose & Goldberg, Linda, 1995. "Investment, Pass-Through and Exchange-Rates: A Cross-Country Comparison," Working Papers 95-14, C.V. Starr Center for Applied Economics, New York University.
  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.
  3. 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.
  4. Linda Goldberg & Joseph Tracy, 1999. "Exchange Rates and Local Labor Markets," NBER Working Papers 6985, National Bureau of Economic Research, Inc.
  5. 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.
  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. Linda Goldberg & Joseph Tracy, 2001. "Exchange Rates and Wages," NBER Working Papers 8137, National Bureau of Economic Research, Inc.
  8. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Citations

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Cited by:
  1. 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.
  2. Diallo, Ibrahima Amadou, 2007. "Exchange rate volatility and investment: a panel data cointegration approach," MPRA Paper 5364, University Library of Munich, Germany.

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