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

  • Author(s) / Creator(s)
  • 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.

  • Date created
    2009-09-01
  • Subjects / Keywords
  • Type of Item
    Article (Published)
  • DOI
    https://doi.org/10.7939/R3MK65R3Z
  • License
    Attribution-NonCommercial 4.0 International
  • Language
  • Citation for previous publication
    • Landon, S., & Smith, C.E. (2009). Investment and the exchange rate: Short run and long run aggregate and sector-level estimates. Journal of International Money and Finance, 28(5), 813-835.
  • Link to related item
    https://doi.org/10.1016/j.jimonfin.2008.07.009