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Investment and the exchange rate: Short run and long run aggregate and sector-level estimates

Stuart Landon () and Constance Smith ()

MPRA Paper from University Library of Munich, Germany

Abstract: Aggregate and sector-level investment equations that incorporate the exchange rate are estimated for a panel of 17 OECD countries using an error correction methodology. A real currency depreciation is found to have a significant negative effect on aggregate investment in both the short run and the long run. This effect is negative in all sectors in the short run, is significant in six of nine sectors, and is particularly persistent in service sectors, sectors that do not generally benefit directly from an expansion of demand following a currency depreciation. Movements in another explanatory variable, the real wage, have an insignificant impact on investment in the short run in most sectors, but a rise in the real wage has a significant negative long run effect on aggregate investment and on investment in six of nine sectors. A simulation shows that movements in the real exchange rate and the real wage can explain a large proportion of cross-country differences in investment.

Keywords: investment; exchange rate (search for similar items in EconPapers)
JEL-codes: E22 F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-opm
Date: 2007-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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Journal Article: Investment and the exchange rate: Short run and long run aggregate and sector-level estimates (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:9958

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