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Real exchange rate uncertainty and private investment in developing countries

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  • Serven, Luis

Abstract

The author examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country-time series data set. He builds a GARCH-based measure of real exchange rate volatility and finds that it has a strong negative impact on investment, after controlling for other standard investment determinants and taking into account their potential endogeneity. The impact of uncertainty is not uniform, however. There is some evidence of threshold effects, so that uncertainty only matters when it exceeds some critical level. In addition, the negative impact of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2823.

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Date of creation: 30 Apr 2002
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Handle: RePEc:wbk:wbrwps:2823

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Keywords: Environmental Economics&Policies; Economic Theory&Research; International Terrorism&Counterterrorism; Fiscal&Monetary Policy; Payment Systems&Infrastructure; Macroeconomic Management; Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Achieving Shared Growth;

References

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  1. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
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  7. Julia Darby & Andrew Hughes Hallett & Jonathan Ireland & Laura Piscitelli, . "The Impact of Exchange Rate Uncertainty on the Level of Investment," ICMM Discussion Papers, Department of Economics University of Strathclyde 49, Department of Economics University of Strathclyde.
  8. 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.
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  11. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(6), pages 945-954, December.
  12. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  13. Kraay, Aart & Loayza, Norman & Servén, Luis & Ventura, Jaume, 2001. "Country Portfolios," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2974, C.E.P.R. Discussion Papers.
  14. Zeira, Joseph, 1990. "Cost uncertainty and the rate of investment," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 14(1), pages 53-63, February.
  15. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 279-88, March.
  16. Joshua Aizenman & Nancy Marion, 1995. "Volatility, Investment and Disappointment Aversion," NBER Working Papers 5386, National Bureau of Economic Research, Inc.
  17. Hartman, Richard, 1972. "The effects of price and cost uncertainty on investment," Journal of Economic Theory, Elsevier, Elsevier, vol. 5(2), pages 258-266, October.
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Citations

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Cited by:
  1. Professor E. Philip Davis, 2002. "Investment and Uncertainty in the G7," NIESR Discussion Papers, National Institute of Economic and Social Research 144, National Institute of Economic and Social Research.
  2. Bagella , Michele & Becchetti , Leonardo & Hasan , Iftekhar, 2004. "The anticipated and concurring effects of EMU: exchange rate volatility, institutions and growth," Research Discussion Papers, Bank of Finland 15/2004, Bank of Finland.
  3. 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.
  4. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
  5. Ricardo Bebczuk & Klaus Schmidt-Hebbel, 2006. "The Feldstein-Horioka Paradox: A New Perspective from the Institutional Sector Level," BCRA Working Paper Series 200603, Central Bank of Argentina, Economic Research Department.
  6. Diallo, Ibrahima Amadou, 2007. "Exchange rate volatility and investment: a panel data cointegration approach," MPRA Paper 5364, University Library of Munich, Germany.
  7. Pablo Acosta & Andrés Loza, 2005. "Short and long run determinants of private investment in Argentina," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 389-406, November.
  8. 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, Elsevier, vol. 28(5), pages 813-835, September.
  9. Ricardo Bebczuk & Klaus Schmidt-Hebbel, 2010. "Revisiting the Feldstein-Horioka Puzzle: An institutional sector view," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 0, pages 69-104, January-D.
  10. Ahmad, Imtiaz & Qayyum, Abdul, 2008. "Effect of Government Spending and Macro-Economic Uncertainty on Private Investment in Services Sector: Evidence from Pakistan," MPRA Paper 11673, University Library of Munich, Germany.
  11. Sanogo, Issa & Gyengani, Zakaria, 2008. "Private investment in guinea, does macro-instability matter? A comparative analysis," MPRA Paper 11606, University Library of Munich, Germany.
  12. Diego Bastourre & Luis Casanova & Alejo Espora, 2011. "Tipo de Cambio Real y Crecimiento: Síntesis de la Evidencia y Agenda de Investigación," Department of Economics, Working Papers 082, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.

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