Real Exchange Rate Uncertainty and Private Investment in Developing Countries

21 Pages Posted: 20 Apr 2016

See all articles by Luis Servén

Luis Servén

World Bank - Development Research Group (DECRG)

Date Written: April 2002

Abstract

Serven examines empirically the link between real exchange rate uncertainty and private investment in developing countries using a large cross country-time series data set. He builds a GARCH-based measure of real exchange rate volatility and finds that it has a strong negative impact on investment, after controlling for other standard investment determinants and taking into account their potential endogeneity. The impact of uncertainty is not uniform, however. There is some evidence of threshold effects, so that uncertainty only matters when it exceeds some critical level. In addition, the negative impact of real exchange rate uncertainty on investment is significantly larger in economies that are highly open and in those with less developed financial systems.

This paper - a product of the Office of the Chief Economist, Latin America and the Caribbean Region - is part of a larger effort in the region to assess the effects of macroeconomic volatility.

JEL Classification: E22, C23

Suggested Citation

Servén, Luis, Real Exchange Rate Uncertainty and Private Investment in Developing Countries (April 2002). World Bank Policy Research Working Paper No. 2823. Available at SSRN: https://ssrn.com/abstract=636150

Luis Servén (Contact Author)

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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