## Real Exchange Rates, Economic Complexity, and Investment

_IMF Working Papers, May 10, 2018_

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## Bibliographic details
- Authors: Steve Brito, Nicolas E Magud, Sebastian Sosa
- Published: May 10, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484354834.001

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### Key findings
- 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, consistent with the traditional Mundell-Fleming model.
- 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.
- The latter 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.

### Interpretation and implications
- Exchange-rate-driven investment dynamics are heterogeneous across countries and depend on the degree of structural economic complexity and the import content of capital goods.
- Policy conclusions drawn from standard Mundell-Fleming intuition may not apply uniformly: in economies with high import dependence for capital goods, currency appreciation can stimulate corporate investment by lowering investment costs.
- Recognizing this heterogeneity is important for exchange rate policy design, investment forecasting, and macroeconomic stabilization strategies.

### Scope and coverage
- Study focuses on firm-level investment responses to real exchange rate movements across advanced economies, emerging Asia, other emerging market and developing economies, and some advanced economies with low structural economic complexity.

### Research attribution
- By Steve Brito, Nicolas E Magud, Sebastian Sosa; May 10, 2018.

*Source: IMF Working Paper No. 2018/107.*

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_Source: https://www.imf.org/en/publications/wp/issues/2018/05/10/real-exchange-rates-economic-complexity-and-investment-45867_