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Exchange rate volatility and investment: a panel data cointegration approach

  • Diallo, Ibrahima Amadou

This paper examines the link between the real exchange rate volatility and domestic investment by using the panel data cointegration techniques. In the first part of the paper, we study the theoretical link between the exchange rate, its volatility and the investment in a small open economy. The model shows that the effects of exchange rate volatility on investment are nonlinear. In the second part, we examine the empirical link between the exchange rate volatility and the investment. The results illustrate that the exchange rate volatility has a strong negative impact on investment. This outcome is robust in low income and middle income countries, and by using an alternative measurement of exchange rate volatility

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File URL: http://mpra.ub.uni-muenchen.de/5364/1/MPRA_paper_5364.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5364.

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Date of creation: Apr 2007
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Handle: RePEc:pra:mprapa:5364
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  1. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
  2. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  4. Tarek Harchaoui & Faouzi Tarkhani & Terence Yuen, 2005. "The Effects of the Exchange Rate on Investment: Evidence from Canadian Manufacturing Industries," Working Papers 05-22, Bank of Canada.
  5. Jose Campa & Linda S. Goldberg, 1993. "Investment in Manufacturing, Exchange-Rates and External Exposure," NBER Working Papers 4378, National Bureau of Economic Research, Inc.
  6. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages C55-67, March.
  7. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY & Jean-Fran├žois BRUN, 1997. "How Instability Lowers African Growth ?," Working Papers 199712, CERDI.
  8. Serven, Luis, 2002. "Real exchange rate uncertainty and private investment in developing countries," Policy Research Working Paper Series 2823, The World Bank.
  9. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  10. Bleaney, Michael & Greenaway, David, 2001. "The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 65(2), pages 491-500, August.
  11. Robert S. Chirinko, 1992. "Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications," Working Papers 9213, Harris School of Public Policy Studies, University of Chicago.
  12. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
  13. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
  14. Vincenzo Atella & Gianfranco Enrico Atzeni & Pier Luigi Belvisi, 2003. "Investment and Exchange Rate Under Uncertainty," CEIS Research Paper 32, Tor Vergata University, CEIS.
  15. Oshikoya, Temitope W, 1994. "Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 42(3), pages 573-96, April.
  16. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University.
  17. 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.
  18. Atella, Vincenzo & Atzeni, Gianfranco Enrico & Belvisi, Pier Luigi, 2003. "Investment and exchange rate uncertainty," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 811-824, November.
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