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Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?

  • Belke, Ansgar

    ()

    (University of Duisburg-Essen)

  • Göcke, Matthias

    ()

In a baseline micro model a band of inaction due to hiring- and firing-costs is widened by option value effects of exchange rate uncertainty. Based on this micro foundation an aggregation approach is presented. Under uncertainty, intervals of weak response to exchange rate reversals (called 'play' areas) are introduced on the macro-level. 'Spurts' in new employment or firing may occur after an initially weak response. Since these mechanisms may apply to other "investment" cases where the aggregation of microeconomic real options effects under uncertainty are relevant, they may even be of a more general interest.

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File URL: http://ftp.iza.org/dp1126.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1126.

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Length: 25 pages
Date of creation: Apr 2004
Date of revision:
Publication status: published in: German Economic Review, 2005, 6 (2), 185-203
Handle: RePEc:iza:izadps:dp1126
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  1. Robert S. Pindyck, 1990. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
  2. Belke, Ansgar & Gocke, Matthias, 1999. "A Simple Model of Hysteresis in Employment under Exchange Rate Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(3), pages 260-86, August.
  3. Gocke, Matthias, 2002. " Various Concepts of Hysteresis Applied in Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 16(2), pages 167-88, April.
  4. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  5. Ricardo J. Caballero & Eduardo M.R.A. Engel & John Haltiwanger, 1995. "Aggregate Employment Dynamics: Building From Microeconomic Evidence," NBER Working Papers 5042, National Bureau of Economic Research, Inc.
  6. Julia Darby & Andrew Hughes Hallett & Jonathan Ireland & Laura Piscitelli, . "The Impact of Exchange Rate Uncertainty on the Level of Investment," ICMM Discussion Papers 49, Department of Economics University of Strathclyde.
  7. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 635-54, November.
  8. Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
  9. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March.
  10. van Garderen, Kees Jan & Lee, Kevin & Pesaran, M. Hashem, 2000. "Cross-sectional aggregation of non-linear models," Journal of Econometrics, Elsevier, vol. 95(2), pages 285-331, April.
  11. Rudiger Dornbusch, 1987. "Open Economy Macroeconomics: New Directions," NBER Working Papers 2372, National Bureau of Economic Research, Inc.
  12. Piscitelli, Laura, et al, 2000. "A Test for Strong Hysteresis," Computational Economics, Society for Computational Economics, vol. 15(1-2), pages 59-78, April.
  13. Parsley, David C & Wei, Shang-Jin, 1993. "Insignificant and Inconsequential Hysteresis: The Case of U.S. Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 606-13, November.
  14. Agathe Cote, . "Exchange Rate Volatility and Trade: A Survey," Working Papers 94-5, Bank of Canada.
  15. repec:dgr:kubcen:199814 is not listed on IDEAS
  16. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  17. Cross, Rod, 1994. "The Macroeconomic Consequences of Discontinuous Adjustment: Selective Memory of Non-dominated Extrema," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(2), pages 212-21, May.
  18. Amable, Bruno & Henry, Jerome & Lordon, Frederic & Topol, Richard, 1994. "Strong hysteresis versus zero-root dynamics," Economics Letters, Elsevier, vol. 44(1-2), pages 43-47.
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