The Impact of Exchange Rate Uncertainty on the Level of Investment
AbstractConventional wisdom has it that increasing price or exchange rate uncertainty will depress investment. Using the Dixit-Pindyck model, we find that there are situations where this does happen; and situations where it does not â i.e. increasing uncertainty leads to more investment. It depends first on the risk of being stuck with (ex-post) unwanted investments, then on the ratio of that risk to the opportunity cost of waiting, and finally on the initial level of uncertainty. There are important threshold effects as you switch from one determinant to another. That allows us to identify when rising volatility would increase or decrease investment; and also to identify which types of industries would gain, and which would suffer, from a move to fixed exchange rates. This is important for monetary union in Europe since it is likely that, even if trade is insensitive to exchange rate volatility, investment with its longer horizon (beyond insurance on the futures markets) is sensitive to such volatility. Our empirical results confirm that.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Department of Economics University of Strathclyde in its series ICMM Discussion Papers with number 49.
Date of creation:
Date of revision:
Contact details of provider:
Postal: Department of Economics University of Strathclyde 100 Cathedral Sreet Glasgow G4 0LN Scotland, UK
Phone: +44 (0)141 548 3842
Fax: +44 (0)141 552 5589
Web page: http://www.strath.ac.uk/Departments/Economics/
More information through EDIRC
Other versions of this item:
- Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages C55-67, March.
- 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.
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (WoPEc Project).
If references are entirely missing, you can add them using this form.