Asymmetrical Linkages between Exchange Rate Shocks And Investment in Agriculture

Abstract

Issue of administering a currency regulatory system has always been one of the key issues in developing countries. The inharmonic exchange rate fluctuates with economic changes, indicating that the direction of domestic and foreign macroeconomic policies are inappropriate, which in turn create problems in assessment of investment projects efficiency. Yearly time series of 1978–2017 are used and a Non-linear Autoregressive Distributed Lag (NARDL) model checks the asymmetrical relationship between Exchange rate shocks and Investment in agriculture. In this study, the Hodrick Prescott filter is used to derive exchange rate shocks. Results have shown that there are asymmetrical linkages between these two variables and therefor negative exchange rate shocks have positive effect and positive exchange shocks have negative and significant effect on investment in agriculture. The occurrence of any currency shock causes a turbulence in economy and leads to reallocation of resources from investing in productive activities- such as agricultural production- to nonproductive activities such as speculating in foreign exchange market, gold and coins. One way to cope with this situation, could be stabilizing exchange rate market in order to minimize uncertainty at financial markets.