Real Exchange Rate Uncertainty and Private Investment in Developing Countries

The author examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country-time series data set. He builds a GARCH-based measure of real exchange rate volatility and finds that it has a strong negative impact on investment, after controlling for other standard investment determinants and taking into account their potential endogeneity. The impact of uncertainty is not uniform, however. There is some evidence of threshold effects, so that uncertainty only matters when it exceeds some critical level. In addition, the negative impact of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems.

Bibliographic Details

Main Author:	Servén, Luis
Language:	English en_US
Published:	World Bank, Washington, D.C. 2002-04
Subjects:	ACCELERATOR, ADVERSE EFFECTS, AGGREGATE VOLATILITY, AVERAGE LEVEL, CAPITAL ACCUMULATION, CAPITAL FORMATION, CAPITAL GOODS, COAL, CROSS COUNTRY, CROSS-COUNTRY SAMPLE, CURRENCY BOARDS, CURRENCY RISK, DECENTRALIZATION, DEPENDENT VARIABLE, DEVELOPING COUNTRIES, DEVELOPING ECONOMIES, DEVELOPMENT ECONOMICS, DYNAMIC PANEL, ECONOMETRIC ANALYSIS, ECONOMETRICS, ECONOMIC DYNAMICS, ECONOMIC INSTABILITY, ECONOMIC REVIEW, ECONOMIC STATISTICS, ECONOMIC STUDIES, ECONOMIC SURVEYS, ECONOMIC THEORY, ELASTICITY, ELASTICITY OF SUBSTITUTION, EMERGING MARKETS, EMPIRICAL LITERATURE, EMPIRICAL RESULTS, EMPIRICAL STUDIES, EMPLOYMENT, EMPLOYMENT EQUATIONS, ESTIMATION RESULTS, EXPLANATORY VARIABLES, EXPORTS, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL SYSTEMS, GDP, GDP DEFLATOR, GROWTH LITERATURE, GROWTH VOLATILITY, IMPERFECT COMPETITION, IMPORTS, INCOME, INCOME COUNTRIES, INCOME DEVELOPING COUNTRIES, INCOME LEVELS, INDUSTRIAL ECONOMIES, INFLATION, INFLATION RATE, INFLATION RATES, INTEREST RATES, INVESTMENT-UNCERTAINTY RELATIONSHIP, IRREVERSIBILITY, LAGGED DEPENDENT, LAGGED LEVELS, LAGGED VALUES, LDCS, LIQUID LIABILITIES, MACROECONOMIC STABILITY, MACROECONOMIC VARIABLES, MACROECONOMIC VOLATILITY, MARGINAL COST, MARGINAL REVENUE, MONETARY ECONOMICS, NATURAL RESOURCES, NEGATIVE EFFECT, NEGATIVE IMPACT, 0 HYPOTHESIS, OPEN ECONOMIES, PER CAPITA INCOME, POLICY RESEARCH, POLITICAL ECONOMY, POOR COUNTRIES, POOR PEOPLE, PRIVATE INVESTMENT, PRIVATE SECTOR, PROFITABILITY, PURCHASING POWER, REAL EXCHANGE, REAL EXCHANGE RATE, REAL EXCHANGE RATE UNCERTAINTY, REAL EXCHANGE RATE VOLATILITY, REAL EXCHANGE RATES, REAL INTEREST, REAL INTEREST RATE, REAL OPTIONS MODEL, RELATIVE PRICE, RETURNS TO SCALE, RICH COUNTRIES, RISK AVERSE, RISK AVERSION, RISK DIVERSIFICATION, SERIAL CORRELATION, SIGNIFICANT EFFECT, SIGNIFICANT IMPACT, TAX REFORM, TECHNOLOGICAL FACTORS, TELECOMMUNICATIONS, TERMS OF TRADE, TIME SERIES, TRADE OPENNESS, TRADE SHOCKS, VALUE ADDED, VARIABLE INPUTS, WEALTH EXCHANGE RATES, PRIVATE INVESTMENTS, ENDOGENOUS VARIABLES, UNCERTAINTY,
Online Access:	http://documents.worldbank.org/curated/en/2002/04/1769432/real-exchange-rate-uncertainty-private-investment-developing-countries https://hdl.handle.net/10986/14809
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