WILL THE EURO BE BENEFICIAL ON FIRM’S INVESTMENT BEHAVIOUR?

Vincenzo Atella (), Gianfranco Enrico Atzeni () and Pierluigi Belvisi

Departmental Working Papers from Tor Vergata University, CEIS

Abstract: The literature on the relationship between exchange rate and investment mainly focus on the devaluation argument, which evidences that a devaluation may affect positively investment spending. The goal of this paper is to extend the analysis to how exchange rate variability can influence firm’s innovation process. Employing a large panel of Italian firms we estimate the impact of exchange rate on investment. Combining an ECM model specification with a model of signal extraction we find that exchange rate volatility reduces investment, with a decreasing sensitivity the greater is firm market power. A stable exchange rate is then an incentive to investment as it allows more reliable estimation of its marginal productivity. To this extent, an 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.

New Economics Papers: this item is included in nep-eec, nep-ifn and nep-mon
Date: 2002-11
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Persistent link: http://EconPapers.repec.org/RePEc:rtv:ceiswp:180

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