On investment and exchange-rate movements

We investigate the ways in which permanent exchange-rate changes may affect investment by influencing domestic and foreign revenue, the cost of imported variable inputs and the investment price of imported capital goods. We find that the revenue and investment-price channels have a quantitatively gr...

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Bibliographic Details
Published in:Applied economics 2014-07, Vol.46 (19), p.2301-2315
Main Authors: Ng, Eric C. Y., Souare, Malick
Format: Article
Language:English
Subjects:
Capital costs
Capital goods
Cost of capital
exchange rate
Exchange rates
Foreign exchange rates
Investment
Investment policy
machinery and equipment
Prices
Profitability
Revenue
Studies
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Summary:We investigate the ways in which permanent exchange-rate changes may affect investment by influencing domestic and foreign revenue, the cost of imported variable inputs and the investment price of imported capital goods. We find that the revenue and investment-price channels have a quantitatively greater effect on investment than the cost channel. The negative effect of the revenue channel, which affects the marginal profitability of capital, outweighs the positive effect of the investment-price channel, which affects the marginal cost of capital, implying that exchange-rate appreciation has a net negative influence on investment. The estimation results are robust to different approaches to extracting the permanent components of exchange rates.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2014.902026