Exchange Rate Flexibility, Volatility and the Patterns of Domestic and Foreign Direct Investment

Joshua Aizenman

No 1992/020, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the factors determining the impact of exchange rate regimes on the behavior of domestic investment and foreign direct investment (FDI). Producers may diversify internationally in order to increase the flexibility of production. We characterize the possible equilibria in a macro model that allows for the presence of a short-run Phillips curve. It is shown that a fixed exchange rate regime is more conducive to FDI relative to a flexible exchange rate, and this conclusion applies for both real and nominal shocks. If the dominant shocks are nominal (real) we will observe a negative (a positive) correlation between exchange rate volatility and the level of investment.

Keywords: WP; exchange rate; exchange rate volatility; investment decision; FDI relative; cost of capital; flexible exchange rate system; FDI flow; production function; risk neutrality; Nondiversified producer; importance of FDI flow; economic value; Phillips curve; Exchange rate arrangements; Exchange rate flexibility; Conventional peg; Exchange rates; Employment; Global (search for similar items in EconPapers)
Pages: 32
Date: 1992-03-01
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Citations: View citations in EconPapers (34)

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Working Paper: Exchange Rate Flexibility, Volatility, and the Patterns of Domestic and Foreign Direct Investment (1992)
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