Investment and exchange rate uncertainty under different regimes

Abstract

This paper examines the impact of the exchange rate uncertainty on investment under different exchange rate regimes. The paper presents a theoretical model where exchange rate is a stochastic process and investment decision behaves as a Real Option. The paper evaluates the performance of a new project investment under free float, fixed and intermediate exchange rate regimes (managed float and crawling peg). The comparison among the different regimes shows that the crawling peg has advantages when compared to other regimes. The regime stability implies that less currency devaluations are necessary to stimulate investment, especially when there is a significant loss of market power in foreign markets. Keywordsexchange rate regimes, uncertainty, investment, real options ResumoEste artigo estuda o impacto da incerteza a respeito da taxa de câmbio no investimento sob diferentes regimes de câmbio. O artigo apresenta um modelo teórico em que a taxa de câmbio é um processo estocástico e o investimento se comporta como uma opção real. O artigo avalia o desempenho de um novo projeto de investimento sob taxas de câmbio flutuante, fixa e intermediária (flutuação administrada e bandas). A comparação entre os diferentes regimes mostra que o regime de bandas cambiais possui vantagens quando comparados aos outros regimes. A estabilidade do regime implica que menores desvalorizações são necessárias para estimular o investimento, especialmente quando há uma perda significativa de poder de mercado nos mercados externos. Palavras-Chaveregimes de câmbio, incerteza, investimento, opções reais Classificação JEL C61, E22, F31

The Impact of Interest Rate, Exchange Rate and European Business Climate on Economic Growth in Romania: An ARDL Approach with Structural Breaks

“…The changes in the exchange rate generate responses in the FDI inflows. Oliveira found that the greater the volatility of the exchange rate, the lower the investments [37]. Sharifi-Renani and Mirfatah reached the same conclusion, the exchange rate volatility, by increasing risk and uncertainty, reduces FDI incentives [38].…”

The Effect of Exchange Rate Uncertainty on Domestic Investment in Ethiopia

“…De Oliveira (2014) compared the relationship between different exchange rate regimes and investment scenarios and showed that crawling peg exchange rate regime has advantages over the other regimes. The regime stability implies that less currency fluctuations are necessary to stimulate investment.…”

Exchange Rate Uncertainty Effects on Domestic Investment in South Africa

“…Bahmani-Oskooee and Hajilee ( 2013) assessed the short-run and long-run effects of exchange rate uncertainty on domestic investment in 36 countries using the bounds test approach; the results indicated that exchange rate uncertainty has a significant short-run effect on domestic investment in 27 countries. De Oliveira (2014) compared the relationship between different exchange rate regimes and investment scenarios and showed that a crawling peg exchange rate regime has advantages over the other regimes. The regime stability implies that fewer currency fluctuations are necessary to stimulate investment.…”