Real Exchange Rates, Economic Complexity, and Investment

By Steve Brito, Nicolas E Magud, Sebastian Sosa

May 10, 2018

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Format: Chicago

Steve Brito, Nicolas E Magud, and Sebastian Sosa. Real Exchange Rates, Economic Complexity, and Investment, (USA: International Monetary Fund, 2018) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Corporate investment, Currencies, Emerging and frontier financial markets, Financial markets, Foreign exchange, Money, National accounts, Real effective exchange rates, Real exchange rates

Keywords: Asia and Pacific, Capital goods, Corporate investment, Currencies, Dividend flow, Emerging and frontier financial markets, Emerging market, Firm level, Firm-level investment, Interest bill, Misalignment, Panel regression, Profit function, Real effective exchange rates, Real exchange rate, Real exchange rates, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/107
Stock No:

WPIEA2018107
ISBN:

9781484354834
ISSN:

1018-5941

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