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Investment and exchange rate uncertainty

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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DOI: 10.1016/S0161-8938(03)00074-7

Abstract

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.

Item Type:Article
ID Code:2334
Status:Published
Refereed:Yes
Uncontrolled Keywords:Exchange rate, firm heterogeneity, investment, uncertainty
Subjects:Area 13 - Scienze economiche e statistiche > SECS-P/01 Economia politica
Divisions:002 Altri enti e centri di ricerca del Nord Sardegna > CRENoS-Centro Ricerche Economiche Nord Sud, Università di Cagliari e Università di Sassari
001 Università di Sassari > 01 Dipartimenti > Economia, impresa, regolamentazione
Publisher:North Holland / Elsevier
ISSN:0161-8938
Copyright Holders:© 2003 Society for Policy Modeling
Deposited On:18 Aug 2009 10:07

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