Exchange rate volatility and its impact on domestic investment

The relationship between exchange rate uncertainty and domestic investment has attracted some attention in macro literature. Previous studies that investigated the relation concentrated on firm level data with mixed results. In this paper we argue that the relationship applies equally at the aggregate. We assess the short-run and long-run effects of exchange rate volatility on domestic investment in each of the 36 countries in our sample using time-series data. The application of the bounds testing approach indicates that exchange rate volatility has significant short-run effects on domestic investment in 27 countries. The short-run effects are translated into the long-run only in 12 countries.