Conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment. Using the Dixit±Pindyck model, we ®nd that there are situations where this will happen; and situations where it does not. There are threshold effects which allows us to identify when rising volatility would increase or decrease investment; and also to identify which types of industries would gain, and which would suffer, from a move to ®xed exchange rates. This is important for monetary union in Europe since it is likely that, even if trade is insensitive to exchange rate volatility, investment with its longer horizon will be affected.
We study the e¤ects of Central Bank transparency on in ‡ation and the output gap. We thus …rst identify a small analytical model which concludes that transparency a¤ects the variability of in ‡ation and output and not their average levels. Then we examine whether this conjecture holds empirically, employing the recently derived index of transparency by Eij¢nger and Geraats. The empirical …ndings con…rm that the averages are not a¤ected by transparency. It does seem to explain however, about 50% of the variability in in ‡ation. The relation between transparency and output volatility is less clear but appears to be positive rather than negative.
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