Exchange rate volatility and investment: a panel data cointegration approach

Diallo, Ibrahima Amadou (2007): Exchange rate volatility and investment: a panel data cointegration approach.

Abstract

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

• Item Type: MPRA Paper
• Institution: Centre D'etudes Et De Recherches Sur Le Développement International (CERDI)
• Language: English
• Keywords: Exchange rate volatility; Investment; Appreciation; Depreciation; Panel data cointegration; Dynamic Optimization; Capital goods; Expectations
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O19 - International Linkages to Development ; Role of International Organizations; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O57 - Comparative Studies of Countries; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy