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Does the Nominal Exchange Rate Regime Matter for Investment?

  • Hjalmar Böhm
  • Michael Funke

This paper analyses the impact of exchange rate uncertainty upon the pattern of investment in different exchange rate regimes (very hard pegs, intermediate regimes, and floats) by means of a unified approach. The comparison of different exchange rate regimes indicates that currency volatility exerts only a small influence upon the level of investment spending. On the other hand, firms turn out to be more cautious about responding to exchange rate shocks in a credible target zone model than in a flexible exchange rate regime or in a target zone model with stochastic realignments.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 578.

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Date of creation: 2001
Date of revision:
Handle: RePEc:ces:ceswps:_578
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  1. Svensson, Lars E O, 1991. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," CEPR Discussion Papers 494, C.E.P.R. Discussion Papers.
  2. repec:oup:restud:v:60:y:1993:i:1:p:95-119 is not listed on IDEAS
  3. Bodnar, G.M. & Gebhart, G., 1998. "Derivatives Usage in Risk Management by US and German Non-Financial Firms: A Comparative Survey," Weiss Center Working Papers 98-03, Wharton School - Weiss Center for International Financial Research.
  4. Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. repec:oup:qjecon:v:84:y:1970:i:2:p:197-216 is not listed on IDEAS
  6. Andrew K. Rose, 1994. "Exchange Rate Volatility, Monetary Policy, and Capital Mobility: Empirical Evidence on the Holy Trinity," NBER Working Papers 4630, National Bureau of Economic Research, Inc.
  7. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  8. Caballero, Ricardo J & Engel, Eduardo M R A, 1993. "Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 95-119, January.
  9. repec:oup:qjecon:v:111:y:1996:i:3:p:753-77 is not listed on IDEAS
  10. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  11. Bordo, Michael D. & Schwartz, Anna J., 1999. "Monetary policy regimes and economic performance: The historical record," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 3, pages 149-234 Elsevier.
  12. Kenneth A. Froot & Maurice Obstfeld, 1989. "Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach," NBER Working Papers 2835, National Bureau of Economic Research, Inc.
  13. Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-88, November.
  14. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
  15. repec:tpr:qjecon:v:84:y:1970:i:2:p:197-216 is not listed on IDEAS
  16. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  17. 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.
  18. repec:oup:qjecon:v:106:y:1991:i:3:p:669-82 is not listed on IDEAS
  19. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  20. repec:oup:qjecon:v:104:y:1989:i:2:p:205-28 is not listed on IDEAS
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