Large Devaluations, Foreign Direct Investment and Exports : A Speculative Note
One side-effect of the Global Financial Crisis of 2008-09 was the resurgence of a debate over exchange rates. The conventional wisdom dictates that real-exchange rate adjustments are needed in order to bring about changes in trade balances across c...
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110331131956 http://hdl.handle.net/10986/3386 |
| Summary: | One side-effect of the Global Financial
Crisis of 2008-09 was the resurgence of a debate over
exchange rates. The conventional wisdom dictates that
real-exchange rate adjustments are needed in order to bring
about changes in trade balances across countries. However,
the literature on the effect of exchange rate fluctuations
and currency under-valuations on exports is surprisingly
ambiguous. This note explores for the first time the
potential role of foreign direct investment as an
intermediate variable in the process of trade adjustment
after large real-exchange rate changes. Real-exchange rate
devaluations might result in increases in foreign direct
investment inflows, as investors can take advantage of
changes in the foreign-currency value of domestic assets. If
so, the response of exports will depend to some extent on
the nature of such foreign direct investment inflows, with
inflows motivated by "horizontal" foreign direct
investment associated with negligible changes in export
growth after devaluation. The author utilizes quarterly data
on real effective exchange rates, foreign direct investment
inflows and exports to explore the effects of large
devaluations (defined as the largest observed quarterly real
effective exchange rate devaluation) on foreign direct
investment and exports from 1990 to 2010. The admittedly
speculative evidence suggests that there were heterogeneous
experiences regarding the timing and magnitude of subsequent
changes in foreign direct investment and exports, but on
average foreign direct investment inflows tended to precede
export surges within two year horizons. |
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