Exchange Rate Flexibility, Volatility, and Domestic and Foreign Direct Investment

Joshua Aizenman

IMF Staff Papers, 1992, vol. 39, issue 4, 890-922

Abstract: The impact of exchange rate regimes on domestic and foreign investment in the presence of a short-run Phillips curve is investigated. Producers may diversify internationally to increase the flexibility of production, thereby diversifying country-specific productivity and monetary shocks. Aggregate investment is shown to be higher under a fixed exchange rate than under a flexible exchange rate for both productivity and monetary shocks. Welfare is not, however, necessarily higher under either regime: a flexible exchange rate stabilizes employment in the presence of real shocks at the cost of reduced expected GNP and investment.

JEL-codes: F15 F21 F33 F36 (search for similar items in EconPapers)
Date: 1992
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