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On investment and exchange-rate movements

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Abstract:

We investigate the ways in which permanent exchange-rate changes may affect investment by influencing domestic and foreign revenue, the cost of imported variable inputs and the investment price of imported capital goods. We find that the revenue and investment-price channels have a quantitatively greater effect on investment than the cost channel. The negative effect of the revenue channel, which affects the marginal profitability of capital, outweighs the positive effect of the investment-price channel, which affects the marginal cost of capital, implying that exchange-rate appreciation has a net negative influence on investment. The estimation results are robust to different approaches to extracting the permanent components of exchange rates.

Keywords: E22; F31; F40; exchange rate; investment; machinery and equipment

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2014.902026

Affiliations: 1: Department of Economics, Hong Kong Baptist University, Kowloon Tong, Hong Kong 2: Economic Research and Policy Analysis Branch, Industry Canada, Ottawa, Canada

Publication date: July 3, 2014

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