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Exchange Rate Uncertainty, Sociopolitical Instability and Private Investment: Empirical Evidence from Latin America

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  • Monica Escaleras
  • Dimitrios D. Thomakos

Abstract

Using exchange rate uncertainty (ERU) and sociopolitical instability (SPI) as measures of macroeconomic imbalances and political disorder, respectively, we investigate the link between these two factors and private investment in Latin America. The analysis shows that while ERU and SPI negatively impact private investment jointly, the individual impact of ERU is much greater than that of SPI. Our results should prove useful both to policymakers and others interested in understanding the impact of uncertainty on private investment. Most importantly, macroeconomic policies that limit excess volatility in relative prices should lessen an economy's general level of investment risk leading to enhanced private investment. Further, though lesser in degree, institutional reforms that reduce social tensions and strengthen property rights should also stimulate private investment. Finally, structural reforms that combine these two are likely to foster a robust market for private investment thus contributing to an economy's growth potential. Copyright © 2007 The Authors.

Suggested Citation

  • Monica Escaleras & Dimitrios D. Thomakos, 2008. "Exchange Rate Uncertainty, Sociopolitical Instability and Private Investment: Empirical Evidence from Latin America," Review of Development Economics, Wiley Blackwell, vol. 12(2), pages 372-385, May.
  • Handle: RePEc:bla:rdevec:v:12:y:2008:i:2:p:372-385
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    1. World Bank, 2002. "World Development Indicators 2002," World Bank Publications, The World Bank, number 13921, June.
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    Cited by:

    1. Ravi Batra & Hamid Beladi, 2013. "Foreign Capital and Urban Congestion in Emerging Markets," Review of Development Economics, Wiley Blackwell, vol. 17(4), pages 676-684, November.
    2. Chia-Ching Lin & Kun-Ming Chen & Hsiu-Hua Rau, 2010. "Exchange Rate Volatility and the Timing of Foreign Direct Investment: Market-Seeking versus Export-Substituting," Review of Development Economics, Wiley Blackwell, vol. 14(s1), pages 466-486, August.
    3. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38766, University Library of Munich, Germany.
    4. Masino, Serena, 2013. "Macro-Institutional Instability and the Incentive to Innovate," MPRA Paper 45938, University Library of Munich, Germany.
    5. Abdi Ali, 2013. "Are property rights institutions and financial development complements or substitutes? The case of private investment," Economics Bulletin, AccessEcon, vol. 33(2), pages 1126-1131.
    6. Erdem Kilic & Veysel Ulusoy, 2015. "Evidence for Financial Contagion in Endogenous Volatile Periods," Review of Development Economics, Wiley Blackwell, vol. 19(1), pages 62-74, February.
    7. repec:spr:portec:v:16:y:2017:i:1:d:10.1007_s10258-016-0126-5 is not listed on IDEAS
    8. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38830, University Library of Munich, Germany.

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