Real Exchange Rates, Economic Complexity, and Investment

22 Pages Posted: 1 Aug 2018

See all articles by Steve Brito

Steve Brito

International Monetary Fund (IMF)

Nicolás E. Magud

International Monetary Fund (IMF)

Sebastiàn Sosa

International Monetary Fund (IMF) - Western Hemisphere Department

Date Written: May 2018

Abstract

We show that the response of firm-level investment to real exchange rate movements varies depending on the production structure of the economy. Firms in advanced economies and in emerging Asia increase investment when the domestic currency weakens, in line with the traditional Mundell-Fleming model. However, in other emerging market and developing economies, as well as some advanced economies with a low degree of structural economic complexity, corporate investment increases when the domestic currency strengthens. This result is consistent with Diaz Alejandro (1963)-in economies where capital goods are mostly imported, a stronger real exchange rate reduces investment costs for domestic firms.

Keywords: Real exchange rates, Capital expenditure, Private investments, Real exchange rate misalignment, Developed countries, Emerging markets, Firm-level investment, real exchange rate, misalignment, Open Economy Macroeconomics

JEL Classification: E22, F31, F41

Suggested Citation

Brito, Steve and Magud, Nicolas E. and Sosa, Sebastian, Real Exchange Rates, Economic Complexity, and Investment (May 2018). IMF Working Paper No. 18/107. Available at SSRN: https://ssrn.com/abstract=3221126

Steve Brito (Contact Author)

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Nicolas E. Magud

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sebastian Sosa

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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