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The Impact of Output and Exchange Rate Volatility on Fixed Private Investment: Evidence from Selected G7 Countries

Abdur Chowdhury () and Mark Wheeler
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Mark Wheeler: Western Michigan University

No 2013-06, Working Papers and Research from Marquette University, Center for Global and Economic Studies and Department of Economics

Abstract: This paper will take a broad based approach in analyzing the structure of the U.S. economy with a particular emphasis on the disruptive U.S. recession anThis study examines the impact of shocks to exchange rate and output uncertainty (volatility) on real private fixed investment (FI) in Canada, Germany, the United Kingdom, and the United States. The analysis is conducted using vector autoregressive models that contain the price level, real output, the volatility of real output, the real exchange rate, the volatility of the real exchange rate, an interest rate, and FI. The results yield important public policy implications with regard to the impact of output volatility of FI. Our analysis indicates that volatility shocks, measured as output volatility or exchange rate volatility, do not have a significant impact on FI for any country in our study.d financial crisis which began circa 2008. The role of the U.S. government and the implications high levels of fiscal debt have on the projected growth path of the U.S. economy will be the primary focus of the paper. The discussion will show that the U.S. has likely entered a new, much more difficult stage in its history of economic growth. The short to medium term growth potential of the U.S. economy has fallen below the trend level established since WWII. The flexibility of the U.S. economy will help foster the necessary adjustments; however, this new era will force difficult fiscal and monetary policy choices that have different implications for different section of the population. The policy makers must recognize the changing dynamics of the U.S. economy and they must be prudent in drafting policy that establishes a stronger foundation for future growth. Younger generations in particular will need to take notice of the decisions being made and plan accordingly as it relates to their spending, saving and investment habits.

Keywords: Fixed investment; exchange rate volatility; G7 countries; VAR model; Variance Decomposition (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2013-11
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