 Investment Decisions under Real Exchange Rate UncertaintyBahar Erdal Central Bank Review, 2001, vol. 1, issue 1, 25-47 Abstract: This paper analyzes the depressing effects of real exchange rate uncertainty on investment spending by using option pricing techniques. Investment under uncertainty assumes that investments are irreversible and can be delayed to wait for new information about prices, exchange rates and other macroeconomic variables. Irreversible investment spending is like a financial call option. When the opportunity to undertake irreversible investment is exercised, it kills the option of investing and the possibility of waiting for new information. Therefore, investment decisions of firms are sensitive to uncertainties over economic environment. Assuming present real exchange rate volatility is a proxy for real exchange rate uncertainty, and investment spending is like a call option, this paper shows that real exchange rate volatility causes optimal real exchange rate level to undertake investment to be higher for export-oriented sectors and lower for import-oriented sectors. Thus, the zone of "inaction" increases, and real investment spending falls as volatility increases regardless of whether the sector is an export-oriented or import-oriented sector. Keywords: Real Exchange Rate; Uncertainty; Investment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:tcb:cebare:v:1:y:2001:i:1:p:25-47 Access Statistics for this article More articles in Central Bank Review from Research and Monetary Policy Department, Central Bank of the Republic of Turkey Contact information at EDIRC. |
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