On the asymmetric effects of the real exchange rate on domestic investment in G7 countries

Abstract

Two studies have assessed the symmetric and asymmetric effects of exchange rate changes on domestic investment. One included six emerging countries and the other one, 18 African nations. Both revealed that using nonlinear models to assess the asymmetric effects yield a more significant outcome compared to symmetric and linear models. We add to this small literature by showing the same using quarterly data from each of the G7 countries. Indeed, nonlinear models produced relatively more short-run and long-run effects of changes in the real effective exchange rate on domestic investment, though in an asymmetric manner.

On the Relation between Exchange Rates and Domestic Investment: Asymmetric Evidence from China's 31 Provinces

“…In examining the asymmetry linkages between exchange rates and domestic investment across China's provinces, we follow Bahmani‐Oskooee and Baek (2020) by considering the following long‐run model of investment: $$${\rm{log}}({I}_{t})={\alpha }_{o}+{\alpha }_{1}{\rm{log}}({y}_{t})+{\alpha }_{2}{\rm{log}}({r}_{t})+{\alpha }_{3}{\rm{log}}({e}_{t})+{\varepsilon }_{t}\,$$$where: $${I}_{t}$$ is the real domestic investment for each of 31 provinces, $${y}_{t}$$ is the real gross provincial product for each of 31 provinces, $${r}_{t}$$ is the nominal interest rate and $${e}_{t}$$ is the real effective exchange rate.…”

“…Since prices in various sectors of the economy tend to be rigid downward but relatively flexible upward in practice, currency depreciation is more likely to have different effects on domestic investment than currency appreciation. Therefore, some recent studies have attempted to include asymmetry in exchange rate changes in their empirical models (for example, Bahmani‐Oskooee Halicioglu and Neumann 2018; Bahmani‐Oskooee and Gelan 2019; Bahmani‐Oskooee and Baek 2020). These research findings commonly endorse exchange rate asymmetry.…”

“…Bahmani‐Oskooee and Gelan (2019), for example, confirm an asymmetric effect of exchange rates on domestic investment in some selected African countries. Bahmani‐Oskooee and Baek (2020) find that domestic investment for G7 economies responds asymmetrically as their currencies fluctuate. Up until now, however, empirical evidence in this line of research has been limited to only a few countries and regions, mostly G‐7 and Africa.…”

Determining Factors of Consumption in Islamic Countries in The World with Political Stability as a Moderating Variable

“…Investors will be very careful in making investments because of fluctuations in exchange rates which will have a major impact on their economic activities. So it is not surprising that many scholars remind the influence of the exchange rate on investment (Qing & Kusairi, 2019;Bahmani-Oskooee & Baek, 2020;Gidey & Nuru, 2021).…”