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Anticipated real exchange-rate changes and the dynamics of investment


  • Serven, Luis


The impact of permanent real depreciation on a country's capital stock is uncertain. Whether total capital stock rises or falls depends on how depreciation affects aggregate demand, the real interest rate, and especially the import content of capital goods. In the long run, the capital stock can be expected to rise in traded goods and fall in nontraded goods. Despite this long-run ambiguity, anticipated changes in real exchange rate have a predictable effect on the dynamics of capital accumulation. They provide an incentive for speculative rellocation of investment over time, so they can greatly distort the timing of investments. In the framework of this paper, the time profile of investment is related to how financially open an economy is and to the import content of capital goods. When a real depreciation is expected, an investment boom is likely to develop if the import content of capital goods is high relative to the degree of capital mobility: the anticipated depreciation promotes flight into foreign goods. Conversely, with high capital mobility, the opposite investment pattern is likely to emerge, as the anticipated depreciation promotes flight into foreign assets.

Suggested Citation

  • Serven, Luis, 1990. "Anticipated real exchange-rate changes and the dynamics of investment," Policy Research Working Paper Series 562, The World Bank.
  • Handle: RePEc:wbk:wbrwps:562

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    References listed on IDEAS

    1. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-143, March.
    2. Browne, Francis X. & McNelis, Paul D., 1990. "Exchange controls and interest rate determination with traded and non-traded assets: the Irish-United Kingdom experience," Journal of International Money and Finance, Elsevier, vol. 9(1), pages 41-59, March.
    3. Buffie, Edward F., 1986. "Devaluation, investment and growth in LDCs," Journal of Development Economics, Elsevier, vol. 20(2), pages 361-379, March.
    4. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    5. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    6. J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
    7. Buiter, Willem H, 1984. "Saddlepoint Problems in Continuous Time Rational Expectations Models: A General Method and Some Macroeconomic Examples," Econometrica, Econometric Society, vol. 52(3), pages 665-680, May.
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