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Exchange rate uncertainty and firm investment plans evidence from Swiss survey data

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  • Binding, Garret
  • Dibiasi, Andreas

Abstract

A sudden change in monetary policy happened in Switzerland on January 15th, 2015. The Swiss National Bank removed the lower exchange rate bound vis-à-vis the Euro. We believe that uncertainty concerning a vital economic indicator as the exchange rate should influence economic activities. We argue that the unexpected removal of the lower bound induced a temporary uncertainty about future prices in foreign markets and believe that this influenced firm investment in the short term. We exploit the unexpected change in monetary policy as a natural experiment and use the continuous nature of business tendency surveys to determine the role of uncertainty in the immediate aftermath of the event. Changes in firm-level expectations are measured by specially designed survey questions. We use this information to disentangle first and second moment effects. We find that uncertainty negatively affects investment in equipment and machinery through real-option effects and believe that uncertainty positively influences expenditures in research and development through growth-option effects. Finally, we argue that focusing on aggregate gross fixed capital formation masks important insights and suggest the use of disaggregated investment data in future research on the relationship between uncertainty and investment.

Suggested Citation

  • Binding, Garret & Dibiasi, Andreas, 2017. "Exchange rate uncertainty and firm investment plans evidence from Swiss survey data," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 1-27.
  • Handle: RePEc:eee:jmacro:v:51:y:2017:i:c:p:1-27
    DOI: 10.1016/j.jmacro.2016.11.004
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    3. Julius Loermann, 2018. "The Impact of CHF/EUR Exchange Rate Uncertainty on Swiss Exports to the Eurozone: Evidence from a Threshold VAR," FIW Working Paper series 189, FIW, revised Feb 2019.
    4. Thorbecke, Willem & Kato, Atsuyuki, 2018. "Exchange rates and the Swiss economy," Journal of Policy Modeling, Elsevier, vol. 40(6), pages 1182-1199.
    5. Oscar Claveria & Enric Monte & Salvador Torra, 2018. "“A geometric approach to proxy economic uncertainty by a metric of disagreement among qualitative expectations”," AQR Working Papers 201803, University of Barcelona, Regional Quantitative Analysis Group, revised Jun 2018.
    6. Dibiasi, Andreas & Abberger, Klaus & Siegenthaler, Michael & Sturm, Jan-Egbert, 2018. "The effects of policy uncertainty on investment: Evidence from the unexpected acceptance of a far-reaching referendum in Switzerland," European Economic Review, Elsevier, vol. 104(C), pages 38-67.
    7. Martin Gurtler, 2018. "What Influences Private Investment? The Case of the Czech Republic," Working Papers 2018/14, Czech National Bank.
    8. Oscar Claveria, 2020. "Business and consumer uncertainty in the face of the pandemic: A sector analysis in European countries," Papers 2012.02091, arXiv.org.
    9. Martin Ruzima & Micheal Kofi Boachie, 2018. "Exchange rate uncertainty and private investment in BRICS economies," Asia-Pacific Journal of Regional Science, Springer, vol. 2(1), pages 65-77, April.
    10. Raphael Auer & Ariel Burstein & Katharina Erhardt & Sarah M. Lein, 2019. "Exports and Invoicing: Evidence from the 2015 Swiss Franc Appreciation," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 533-538, May.
    11. Goodness C. Aye & Laurence Harris, 2019. "The effect of real exchange rate volatility on income distribution in South Africa," WIDER Working Paper Series wp-2019-29, World Institute for Development Economic Research (UNU-WIDER).
    12. Oscar Claveria & Enric Monte & Salvador Torra, 2019. "Economic Uncertainty: A Geometric Indicator of Discrepancy Among Experts’ Expectations," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 143(1), pages 95-114, May.
    13. Oscar Claveria, 0. "Uncertainty indicators based on expectations of business and consumer surveys," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 0, pages 1-23.
    14. Goel, Rajeev K. & Nelson, Michael A., 2019. "Using innovation to hedge against economic and political uncertainty evidence from emerging nations," Kiel Working Papers 2142, Kiel Institute for the World Economy (IfW).
    15. Klaus Abberger & Andreas Dibiasi & Michael Siegenthaler & Jan-Egbert Sturm, 2016. "The Effect of Policy Uncertainty on Investment Plans: Evidence from the Unexpected Acceptance of a Far-Reaching Referendum in Switzerland," CESifo Working Paper Series 5887, CESifo.
    16. Claudiu Tiberiu Albulescu & Şerban Miclea & Simina Silvana Suciu & Matei Tămăşilă, 2018. "Firm-level investment in the extractive industry from CEE countries: the role of macroeconomic uncertainty and internal conditions," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 8(2), pages 193-208, June.
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    More about this item

    Keywords

    Investment; Uncertainty; Irreversibility; Switzerland;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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