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Exchange Rate Flexibility, Volatility, and Domestic and Foreign Direct Investment

Author

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  • Joshua Aizenman

    (International Monetary Fund)

Abstract

The impact of exchange rate regimes on domestic and foreign investment in the presence of a short-run Phillips curve is investigated. Producers may diversify internationally to increase the flexibility of production, thereby diversifying country-specific productivity and monetary shocks. Aggregate investment is shown to be higher under a fixed exchange rate than under a flexible exchange rate for both productivity and monetary shocks. Welfare is not, however, necessarily higher under either regime: a flexible exchange rate stabilizes employment in the presence of real shocks at the cost of reduced expected GNP and investment.

Suggested Citation

  • Joshua Aizenman, 1992. "Exchange Rate Flexibility, Volatility, and Domestic and Foreign Direct Investment," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 890-922, December.
    • Handle: RePEc:pal:imfstp:v:39:y:1992:i:4:p:890-922
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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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