Exchange Rate Uncertainty, Sociopolitical Instability and Private Investment: Empirical Evidence from Latin America

Abstract

AbstractUsing exchange rate uncertainty (ERU) and sociopolitical instability (SPI) as measures of macroeconomic imbalances and political disorder, respectively, we investigate the link between these two factors and private investment in Latin America. The analysis shows that while ERU and SPI negatively impact private investment jointly, the individual impact of ERU is much greater than that of SPI. Our results should prove useful both to policymakers and others interested in understanding the impact of uncertainty on private investment. Most importantly, macroeconomic policies that limit excess volatility in relative prices should lessen an economy’s general level of investment risk leading to enhanced private investment. Further, though lesser in degree, institutional reforms that reduce social tensions and strengthen property rights should also stimulate private investment. Finally, structural reforms that combine these two are likely to foster a robust market for private investment thus contributing to an economy’s growth potential.