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

Author

Listed:
  • 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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    Citations

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    Cited by:

    1. Mondher Cherif & Christian Dreger, 2015. "The Impact of South-South Trade Agreements on FDI," Discussion Papers of DIW Berlin 1461, DIW Berlin, German Institute for Economic Research.
    2. repec:taf:wjabxx:v:18:y:2017:i:3:p:380-392 is not listed on IDEAS
    3. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2013. "Foreign Direct Investment and Exchange Rate Regimes," Economics Bulletin, AccessEcon, vol. 33(1), pages 843-858.
    4. Bahar Erdal, 2001. "Investment Decisions under Real Exchange Rate Uncertainty," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 1(1), pages 25-47.
    5. Bernard Njindan Iyke & Sin-Yu Ho, 2017. "The Real Exchange Rate, the Ghanaian Trade Balance, and the J-curve," Journal of African Business, Taylor & Francis Journals, vol. 18(3), pages 380-392, July.
    6. Hommel, Ulrich, 2003. "Financial versus operative hedging of currency risk," Global Finance Journal, Elsevier, vol. 14(1), pages 1-18, May.
    7. Rajesh Chakrabarti & Barry Scholnick, 2002. "Exchange rate expectations and foreign direct investment flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 138(1), pages 1-21, March.
    8. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April.
    9. Hjalmar Böhm & Michael Funke, 2001. "Does the Nominal Exchange Rate Regime Matter for Investment?," CESifo Working Paper Series 578, CESifo Group Munich.
    10. Njindan Iyke, Bernard & Ho, Sin-Yu, 2017. "Exchange Rate Uncertainty and Domestic Investment in Ghana," MPRA Paper 80474, University Library of Munich, Germany.
    11. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    12. Martin Bohl & Frank McDonald & Heinz-Josef Tuselmann & Svitlana Voronkova & Paul Windrum, 2011. "The German model of capitalism and the persistence of outward foreign direct investment: evidence from German manufacturing industries," Economy of region, Centre for Economic Security, Institute of Economics of Ural Branch of Russian Academy of Sciences, vol. 1(2), pages 119-125.
    13. repec:eee:jimfin:v:77:y:2017:i:c:p:143-163 is not listed on IDEAS
    14. Sandy Kyaw, 2006. "Foreign Direct Investment to Developing Countries in the Globalised World," Working Papers id:758, eSocialSciences.

    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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