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Please use this identifier to cite or link to this item: http://hdl.handle.net/2108/56

Title: Investment and exchange rate under uncertainty
Authors: Atella, Vincenzo
Keywords: exchange rate
firm heterogeneity
investment
uncertainty
Issue Date: Aug-2003
Publisher: CEIS
Series/Report no.: CEIS Tor Vergata Research Paper
32
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.
URI: http://ssrn.com/abstract=428582
http://hdl.handle.net/2108/56
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