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The Impact of Short‐ and Long‐run Exchange Rate Uncertainty on Investment: A Panel Study of Industrial Countries *
Author(s) -
Byrne Joseph P.,
Philip Davis E.
Publication year - 2005
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2005.00121.x
Subject(s) - economics , econometrics , heteroscedasticity , volatility (finance) , autoregressive model , autoregressive conditional heteroskedasticity , exchange rate , panel data , investment (military) , variance decomposition of forecast errors , estimation , monetary economics , management , politics , political science , law
We examine the relationship between aggregate investment and exchange rate uncertainty in the G7, using panel estimation and decomposition of volatility derived from the components generalized autoregressive conditionally heteroscedastic (GARCH) model. Our dynamic panel approach takes account of potential cross‐sectional heterogeneity, which can lead to bias in estimation. We find that for a poolable subsample of European countries, it is the transitory and not the permanent component of volatility which adversely affects investment. To the extent that short‐run uncertainty in the CGARCH model characterizes higher frequency shocks generated by volatile short‐term capital flows, these are most deleterious for investment.