PANEL ESTIMATION OF THE IMPACT OF EXCHANGE RATE UNCERTAINTY ON INVESTMENT IN THE MAJOR INDUSTRIAL COUNTRIES

Joseph Byrne and E Davis ()

Public Policy Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: We estimate the impact of exchange rate uncertainty on investment, using panel estimation featuring a decomposition of exchange rate volatility derived from the components GARCH model of Engle and Lee (1999). For a poolable subsample of EU countries, it is the transitory and not the permanent component of volatility which adversely affects investment, implying high frequency shocks of the type that may be generated by volatile short term capital flows are most deleterious for investment. Results based on EGARCH also suggest that the response of investment to exchange rate uncertainty may depend partly on the sign of the initial shock. (100 words)

Pages: 28 pages
Date: 2003-02
New Economics Papers: this item is included in nep-fin and nep-ifn
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Working Paper: PANEL ESTIMATION OF THE IMPACT OF EXCHANGE RATE UNCERTAINTY ON INVESTMENT IN THE MAJOR INDUSTRIAL COUNTRIES (2003)
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