On the relation between currency depreciation and domestic investment

• Published in: Journal of post Keynesian economics Vol. 32; no. 4; pp. 645 - 660
• Main Authors: Bahmani-Oskooee, Mohsen, Hajilee, Massomeh
• Format: Journal Article
• Language: English
• Published: Abingdon Routledge 01.07.2010; M. E. Sharpe; M.E. Sharpe, Inc; Taylor & Francis Ltd
• Series: Journal of Post Keynesian Economics
• Subjects: bounds testing; Capital investments; Coefficients; Currencies; Currency devaluation; Depreciation; Devaluation; domestic investment; Domestic market; Exchange rates; Financial incentives; Financial investments; Foreign exchange rates; Inflation; Interest rates; Investment; Investment return rates; Post Keynesian economics; Profit; Real exchange rates; Studies; Time series; Trade deficit
• ISSN: 0160-3477; 1557-7821
• DOI: 10.2753/PKE0160-3477320409

In introducing an absorption approach to the trade balance, Alexander (1952) argued that if wages do not adjust fully to the inflationary effects of devaluation, devaluation can redistribute income from workers to producers in the form of increased profits. Increased profits, in turn, could give incentive to producers to invest more. On the other hand, because devaluation raises the costs of imported inputs, it could lower profits. Depending on the relative strength of these two channels, domestic investment could increase or decrease. By giving greater consideration to the short-run and the long-run effect of currency depreciation on domestic investment, this paper presents empirical results from a time-series model of 50 countries. We find that the devaluation-investment link is mostly a short-run phenomenon. However, in 21 countries in which the short-run effects last into the long run, both views are supported, almost equally.