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The impact of exchange rate volatility on plant-level investment: Evidence from Colombia

Ivan Kandilov and Asli Leblebicioglu ()

Journal of Development Economics, 2011, vol. 94, issue 2, 220-230

Abstract: We estimate the impact of exchange rate volatility on firms' investment decisions in a developing country setting. Employing plant-level panel data from the Colombian Manufacturing Census, we estimate a dynamic investment equation using the system-GMM estimator developed by Arellano and Bover (1995) and Blundell and Bond (1998). We find a robust negative impact of exchange rate volatility, constructed either using a GARCH model or a simple standard deviation measure, on plant investment. Consistent with theory, we also document that the negative effect is mitigated for establishments with higher mark-up or exports, and exacerbated for lower mark-up plants with larger volume of imported intermediates.

Keywords: Exchange; rate; volatility; Investment; Colombia (search for similar items in EconPapers)
Date: 2011
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