Exchange rate volatility and domestic investment in G7: are the effects asymmetric?

Abstract

One strand of the literature in exchange rate economics argues and demonstrates that exchange rate uncertainty could affect domestic investment in either direction. In this paper, we argue and demonstrate that the effects of exchange rate volatility on domestic investment could be asymmetric, meaning that increased uncertainty may have different effect in size or direction than decreased uncertainty. We use data from each of the G7 countries and how those effects are asymmetric in the short run in almost all seven countries. However, short-run asymmetric effects translate into the long-run only in Germany and the U.S. While in the U.S., long-run effects are asymmetric, in Germany they are not.