Exchange Rate Flexibility, Volatility and the Patterns of Domestic and Foreign Direct Investment
March 1, 1992
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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.
Subject: Conventional peg, Employment, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, Labor
Keywords: Conventional peg, cost of capital, economic value, Employment, exchange rate, Exchange rate arrangements, Exchange rate flexibility, exchange rate volatility, Exchange rates, FDI flow, FDI relative, flexible exchange rate system, Global, importance of FDI flow, investment decision, Nondiversified producer, Phillips curve, production function, risk neutrality, WP
Pages:
32
Volume:
1992
DOI:
Issue:
020
Series:
Working Paper No. 1992/020
Stock No:
WPIEA0201992
ISBN:
9781451843798
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 39, No. 4, December 1992.
