Investment and the Exchange Rate

Francesco Nucci and Alberto Pozzolo

No 344, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper investigates the relationship between exchange rate fluctuations and the investment decisions of a sample of Italian manufacturing firms. The results support the view that a depreciation of the exchange rate has a positive effect on investment through the revenue channel, and a negative effect through the cost channel. The magnitude of these effects varies over time with changes in the firm’s external orientation, as measured by the share of foreign sales over total sales and the reliance on imported inputs. Consistent with the predictions of our theoretical framework, the effect of exchange rate fluctuations on investment is stronger for firms with low monopoly power and for those facing a high degree of import penetration in the domestic market. We also provide evidence that the degree of substitutability between domestically-produced and imported inputs influences the effect through the expenditure side.

Keywords: exchange rate; investment; Firm's exposure (search for similar items in EconPapers)
JEL-codes: E22 F31 (search for similar items in EconPapers)
Date: 1998-12
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Citations: View citations in EconPapers (5)

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Working Paper: Investment and the Exchange Rate (1998)
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