Exchange Rate Uncertainty and Firm Investment Plans - Evidence from Swiss Survey Data

KOF Working Papers No 400

30 Pages Posted: 15 Jan 2016

See all articles by Garret Binding

Garret Binding

ETH Zürich - KOF Swiss Economic Institute

Andreas Dibiasi

EURAC Research; ETH Zürich - KOF Swiss Economic Institute

Date Written: January 15, 2016

Abstract

A sudden change in monetary policy happened in Switzerland on January 15th, 2015. The Swiss National Bank removed a lower exchange rate bound vis-à-vis the Euro. This unexpected change of regime induced a temporary uncertainty about future prices in foreign markets. We believe that this hampers firm investment in the short term. Using this change in monetary policy as a natural experiment and exploiting the continuous nature of a micro-level business tendency survey, we identify the source of uncertainty and disentangle first and second moment effects. We find that price uncertainty affects investment in equipment and machinery through real option effects and believe that growth option effects positively influences expenditures in research and development. We show that focusing on aggregate gross fixed capital formation masks important insights and suggest the use of dis-aggregated investment data to deepen our knowledge on the relationship between uncertainty and investment.

Keywords: investment, uncertainty, irreversibility, Switzerland

JEL Classification: D81, D84, E22

Suggested Citation

Binding, Garret and Dibiasi, Andreas, Exchange Rate Uncertainty and Firm Investment Plans - Evidence from Swiss Survey Data (January 15, 2016). KOF Working Papers No 400, Available at SSRN: https://ssrn.com/abstract=2716077 or http://dx.doi.org/10.2139/ssrn.2716077

Garret Binding

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Andreas Dibiasi (Contact Author)

EURAC Research ( email )

Viale Druso, 1
Drususallee 1
Bolzano / Bozen, 39100
Italy

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

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