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The impact of exchange rate volatility on plant-level investment: Evidence from Colombia

  • Kandilov, Ivan T.
  • Leblebicioglu, AslI

We estimate the impact of exchange rate volatility on firms' investment decisions in a developing country setting. Employing plant-level panel data from the Colombian Manufacturing Census, we estimate a dynamic investment equation using the system-GMM estimator developed by Arellano and Bover (1995) and Blundell and Bond (1998). We find a robust negative impact of exchange rate volatility, constructed either using a GARCH model or a simple standard deviation measure, on plant investment. Consistent with theory, we also document that the negative effect is mitigated for establishments with higher mark-up or exports, and exacerbated for lower mark-up plants with larger volume of imported intermediates.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 94 (2011)
Issue (Month): 2 (March)
Pages: 220-230

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Handle: RePEc:eee:deveco:v:94:y:2011:i:2:p:220-230
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