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Does devaluation hurt private investment? The Indonesian case

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  • Chhibber, Ajay
  • Shafik, Nemat

Abstract

Devaluation affects investment because of its effect on the real supply price of capital goods; the real price of imported inputs, w???????????????hich together with capital goods are used to produce output; the real product wage and thereby profitability and investment; real income, which affects the demand for domestically produced goods; and nominal and real interest rates, which in turn affect investment. This paper discusses the channels between devaluation and private investment and sets out the error correction growth-investment model. It also describes the trends in Indonesia's key macroeconomic variables and policy changes that have driven investment behavior. The estimates of the model are presented with a set of simulations that look at the short- versus long-run implications of devaluation on private investment.

Suggested Citation

  • Chhibber, Ajay & Shafik, Nemat, 1990. "Does devaluation hurt private investment? The Indonesian case," Policy Research Working Paper Series 418, The World Bank.
    • Handle: RePEc:wbk:wbrwps:418
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    References listed on IDEAS

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    1. Boccara, Bruno & Nsengiyumva, Fabien, 1995. "Short-term supply responde to a devaluation : a model's implications for primary commodity-exporting developing countries," Policy Research Working Paper Series 1428, The World Bank.
    2. Shiferaw, A., 2002. "Private investment and public policy in sub-Saharan Africa," ISS Working Papers - General Series 19100, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    3. Shafik, Nemat, 1990. "Modeling investment behavior in developing countries : an application to Egypt," Policy Research Working Paper Series 452, The World Bank.
    4. Chhibber, Ajay & Kalloor, Akshata, 2016. "Reviving Private Investment in India: Determinants and Policy Levers," Working Papers 16/181, National Institute of Public Finance and Policy.
    5. Ajay Chhibber & Mansoor Dailami, 1993. "Fiscal Policy and Private Investment in Developing Countries: Recent Evidence on Key Selected Issues," Palgrave Macmillan Books, in: Riccardo Faini & Jaime Melo (ed.), Fiscal Issues in Adjustment in Developing Countries, pages 121-150, Palgrave Macmillan.
    6. Matin, Kazi M. & Wasow, Bernard, 1992. "Adjustment and private investment in Kenya," Policy Research Working Paper Series 878, The World Bank.

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