Atella, Vincenzo and Atzeni, Gianfranco Enrico and Belvisi, Pier Luigi (2002) Will the euro be beneficial on firm’s investment behaviour? An empirical investigation on a panel of Italian firms. Roma, CEIS. p. 28 (Quaderni Ceis, 2002, 180). Working Paper.
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The literature on the relationship between exchange rate and investment mainly focus on the devaluation argument, which evidences that a devaluation may affect positively investment spending. The goal of this paper is to extend the analysis to how exchange rate variability can influence firm’s innovation process. Employing a large panel of Italian firms we estimate the impact of exchange rate on investment. Combining an ECM model specification with a model of signal extraction we find that exchange rate volatility reduces investment, with a decreasing sensitivity the greater is firm market power. A stable exchange rate is then an incentive to investment as it allows more reliable estimation of its marginal productivity. To this extent, an 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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