Cover IMF Working Papers
Buy Book in Print
Real Exchange Rates, Economic Complexity, and Investment
Author:
Steve Brito null

Search for other papers by Steve Brito in
Current site
Google Scholar Close
,
Mr. Nicolas E Magud
Search for other papers by Mr. Nicolas E Magud in
Current site
Google Scholar Close
, and
Mr. Sebastian Sosa
Search for other papers by Mr. Sebastian Sosa in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 2018: Issue 107
Language:
English
Publication Date:
10 May 2018
DOI:
https://doi.org/10.5089/9781484354834.001
ISBN:
9781484354834
ISSN:
1018-5941
Pages:
21
Keywords:
WP; capital goods; emerging market; Firm-level investment; real exchange rate; misalignment; profit function; panel regression; dividend flow; interest bill; firm level; Real exchange rates; Real effective exchange rates; Currencies; Emerging and frontier financial markets; Corporate investment; Asia and Pacific
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (1.3 MB) Download Epub
We show that the response of firm-level investment to real exchange rate movements varies depending on the production structure of the economy. Firms in advanced economies and in emerging Asia increase investment when the domestic currency weakens, in line with the traditional Mundell-Fleming model. However, in other emerging market and developing economies, as well as some advanced economies with a low degree of structural economic complexity, corporate investment increases when the domestic currency strengthens. This result is consistent with Diaz Alejandro (1963)—in economies where capital goods are mostly imported, a stronger real exchange rate reduces investment costs for domestic firms.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund