The Impact of Exchange Rate Uncertainty on the Level of Investment
Conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment. Using the Dixit-Pindyck (1994) model, the authors find that there are situations where this will happen and situations where it does not. There are threshold effects, which allows them to identify when rising volatility would increase or decrease investment and also to identify which types of industries would gain, and which would suffer, from a move to fixed exchange rates. This is important for monetary union in Europe since it is likely that, even if trade is insensitive to exchange rate volatility, investment with its longer horizon will be affected. Coauthors are Andrew Hughes Hallett, Jonathan Ireland, and Laura Piscitelli.
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