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Does devaluation hurt private investment? The Indonesian case

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  • Chhibber, Ajay
  • Shafik, Nemat
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    Abstract

    Devaluation affects investment because of its effect on the real supply price of capital goods; the real price of imported inputs, w???????????????hich together with capital goods are used to produce output; the real product wage and thereby profitability and investment; real income, which affects the demand for domestically produced goods; and nominal and real interest rates, which in turn affect investment. This paper discusses the channels between devaluation and private investment and sets out the error correction growth-investment model. It also describes the trends in Indonesia's key macroeconomic variables and policy changes that have driven investment behavior. The estimates of the model are presented with a set of simulations that look at the short- versus long-run implications of devaluation on private investment.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 418.

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    Date of creation: 31 May 1990
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    Handle: RePEc:wbk:wbrwps:418

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    Keywords: Economic Theory&Research; Environmental Economics&Policies; Macroeconomic Management; International Terrorism&Counterterrorism; Trade and Regional Integration;

    References

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    1. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
    2. J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
    3. Buffie, Edward F, 1986. "Devaluation and Imported Inputs: The Large Economy Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 123-40, February.
    4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
    5. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 2(2), pages 111-120, July.
    6. Serven, Luis & Solimano, Andres, 1992. "Private Investment and Macroeconomic Adjustment: A Survey," World Bank Research Observer, World Bank Group, World Bank Group, vol. 7(1), pages 95-114, January.
    7. Serven, Luis & Solimano, Andres, 1989. "Private investment and macroeconomic adjustment : an overview," Policy Research Working Paper Series 339, The World Bank.
    8. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
    9. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, Econometric Society, vol. 51(1), pages 153-74, January.
    10. Hall, S G, 1986. "An Application of the Granger & Engle Two-Step Estimation Procedure to United Kingdom Aggregate Wage Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 229-39, August.
    11. Salmon, Mark H, 1982. "Error Correction Mechanisms," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(367), pages 615-29, September.
    12. Currie, David A, 1981. "Some Long Run Features of Dynamic Time Series Models," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(363), pages 704-15, September.
    13. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 16(4), pages 641-54, November.
    14. Jenkinson, T J, 1986. "Testing Neo-Classical Theories of Labour Demand: An Application of Cointegration Techniques," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 241-51, August.
    15. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(352), pages 661-92, December.
    16. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
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    Cited by:
    1. Chhibber, Ajay & Dailami, Mansoor, 1990. "Fiscal policy and private investment in developing countries : recent evidence on key selected issues," Policy Research Working Paper Series 559, The World Bank.
    2. Shafik, Nemat, 1990. "Modeling investment behavior in developing countries : an application to Egypt," Policy Research Working Paper Series 452, The World Bank.
    3. Matin, Kazi M. & Wasow, Bernard, 1992. "Adjustment and private investment in Kenya," Policy Research Working Paper Series 878, The World Bank.

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