Exchange Rate Flexibility, Volatility and the Patterns of Domestic and Foreign Direct Investment
Summary:
This paper investigates the factors determining the impact of exchange rate regimes on the behavior of domestic investment and foreign direct investment (FDI). Producers may diversify internationally in order to increase the flexibility of production. We characterize the possible equilibria in a macro model that allows for the presence of a short-run Phillips curve. It is shown that a fixed exchange rate regime is more conducive to FDI relative to a flexible exchange rate, and this conclusion applies for both real and nominal shocks. If the dominant shocks are nominal (real) we will observe a negative (a positive) correlation between exchange rate volatility and the level of investment.
Series:
Working Paper No. 1992/020
Subject:
Conventional peg Employment Exchange rate arrangements Exchange rate flexibility Exchange rates Foreign exchange Labor
Notes:
Also published in Staff Papers, Vol. 39, No. 4, December 1992.
English
Publication Date:
March 1, 1992
ISBN/ISSN:
9781451843798/1018-5941
Stock No:
WPIEA0201992
Pages:
32
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