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Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?

  • Ansgar Belke
  • Matthias Göcke

In a baseline micro model a band of inaction due to hiring and firing costs is widened by option value effects of exchange rate uncertainty. Based on this micro foundation, an aggregation approach is presented. Under uncertainty, intervals of weak response to exchange rate reversals (called 'play' areas) are introduced on the macro level. 'Spurts' in new employment or firing may occur after an initially weak response. Since these mechanisms may apply to other 'investment' cases where the aggregation of microeconomic real options effects under uncertainty are relevant, they may even be of a more general interest. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2005.

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Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 6 (2005)
Issue (Month): 2 (05)
Pages: 185-203

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Handle: RePEc:bla:germec:v:6:y:2005:i:2:p:185-203
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  1. Rudiger Dornbusch, 1987. "Open Economy Macroeconomics: New Directions," NBER Working Papers 2372, National Bureau of Economic Research, Inc.
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