Investment and Exchange Rate Under Uncertainty

16 Pages Posted: 1 Aug 2003

See all articles by Vincenzo Atella

Vincenzo Atella

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS); Department of Economics and Finance; University of Rome Tor Vergata - Faculty of Economics

Gianfranco Enrico Atzeni

University of Sassari - Dip.to di Economia Impresa e Regolamentazione; Universita di Cagliari - Centre for North South Economic Research (CRENOS)

Pier Luigi Belvisi

Università degli Studi di Roma Tor Vergata - Faculty of Law

Date Written: August 2003

Abstract

The literature on the relationship between exchange rate and investment mainly focuses on the devaluation argument, which provides evidence that a devaluation may positively affect investment spending. The goal of this paper is to extend the analysis to how exchange rate variability can influence firm innovation process. Employing a large panel of Italian firms and using a model of signal extraction we find that exchange rate volatility reduces investment, with a decreasing sensitivity the greater the firm market power. A stable exchange rate is then an incentive to invest as it allows a more reliable estimation of its marginal productivity. To this extent, any economic system may benefit from a stable exchange rate in terms of investment and profit, provided it is able to strengthen its firm market power.

Keywords: exchange rate, firm heterogeneity, investment, uncertainty

JEL Classification: D81, E22, F41, F42

Suggested Citation

Atella, Vincenzo and Atzeni, Gianfranco Enrico and Belvisi, Pier Luigi, Investment and Exchange Rate Under Uncertainty (August 2003). CEIS Tor Vergata - Research Paper Series No. 32. Available at SSRN: https://ssrn.com/abstract=428582 or http://dx.doi.org/10.2139/ssrn.428582

Vincenzo Atella (Contact Author)

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Via Columbia, 2
Rome, I-00133
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+39 06 72595648 (Phone)

Department of Economics and Finance ( email )

Via Columbia 2
Roma, 00133
Italy

University of Rome Tor Vergata - Faculty of Economics ( email )

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Italy
+39 06 72595635 (Phone)
+30 06 2020 500 (Fax)

HOME PAGE: http://www.economia.uniroma2.it/sefemeq/professori/atella/

Gianfranco Enrico Atzeni

University of Sassari - Dip.to di Economia Impresa e Regolamentazione ( email )

Viale Regina Margherita 15
07100 Sassari
Italy
39-079-228939 (Phone)

Universita di Cagliari - Centre for North South Economic Research (CRENOS) ( email )

V. S. Ignazio 78
Cagliari, 09124
Italy

Pier Luigi Belvisi

Università degli Studi di Roma Tor Vergata - Faculty of Law ( email )

Via di Tor Vergata
Rome, Lazio
Italy

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