Atella, Vincenzo and Atzeni, Gianfranco Enrico and Belvisi, Pier Luigi (2003) Investment and exchange rate uncertainty. Journal of Policy Modeling, Vol. 25 (8), p. 811-824. ISSN 0161-8938. Article.
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The literature on the relationship between exchange rate and investment mainly focuses on the devaluation argument, which provides evidence that a devaluation may positively affect investment spending. The goal of this paper is to extend the analysis to how exchange rate variability can influence firm innovation process. Employing a large panel of Italian firms and using a model of signal extraction we find that exchange rate volatility reduces investment, with a decreasing sensitivity the greater the firm market power. A stable exchange rate is then an incentive to invest as it allows a more reliable estimation of its marginal productivity. To this extent, any economic system may benefit from a stable exchange rate in terms of investment and profit, provided it is able to strengthen its firm market power.
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