Investment and Exchange Rate Under Uncertainty

Vincenzo Atella (), Gianfranco Enrico Atzeni () and Pier Luigi Belvisi ()
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Pier Luigi Belvisi: Universitˆ degli Studi di Roma Tor Vergata - Faculty of Law

CEIS Research Paper from Tor Vergata University, CEIS

Abstract: The literature on the relationship between exchange rate and investment mainly focuses on the devaluation argument, which provides evidence that a devaluation may positively affect investment spending. The goal of this paper is to extend the analysis to how exchange rate variability can influence firm innovation process. Employing a large panel of Italian firms and using a model of signal extraction we find that exchange rate volatility reduces investment, with a decreasing sensitivity the greater the firm market power. A stable exchange rate is then an incentive to invest as it allows a more reliable estimation of its marginal productivity. To this extent, any economic system may benefit from a stable exchange rate in terms of investment and profit, provided it is able to strengthen its firm market power.

Keywords: exchange rate; firm heterogeneity; investment; uncertainty (search for similar items in EconPapers)
JEL-codes: D81 E22 F41 F42 (search for similar items in EconPapers)
Date: 2003-08-01
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