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

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  • Monica Escaleras
  • Dimitrios D. Thomakos

Abstract

Using 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.

Suggested Citation

  • Monica Escaleras & Dimitrios D. Thomakos, 2008. "Exchange Rate Uncertainty, Sociopolitical Instability and Private Investment: Empirical Evidence from Latin America," Review of Development Economics, Wiley Blackwell, vol. 12(2), pages 372-385, May.
    • Handle: RePEc:bla:rdevec:v:12:y:2008:i:2:p:372-385
    DOI: 10.1111/j.1467-9361.2007.00378.x
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    1. World Bank, 2002. "World Development Indicators 2002," World Bank Publications - Books, The World Bank Group, number 13921.
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    Cited by:

    1. Masino, Serena, 2013. "Macro-Institutional Instability and the Incentive to Innovate," MPRA Paper 45178, University Library of Munich, Germany.
    2. Abdi Ali, 2013. "Are property rights institutions and financial development complements or substitutes? The case of private investment," Economics Bulletin, AccessEcon, vol. 33(2), pages 1126-1131.
    3. Erdem Kilic & Veysel Ulusoy, 2015. "Evidence for Financial Contagion in Endogenous Volatile Periods," Review of Development Economics, Wiley Blackwell, vol. 19(1), pages 62-74, February.
    4. Ravi Batra & Hamid Beladi, 2013. "Foreign Capital and Urban Congestion in Emerging Markets," Review of Development Economics, Wiley Blackwell, vol. 17(4), pages 676-684, November.
    5. Grzegorz Tchorek & Michał Brzozowski & Paweł Śliwiński, 2017. "Determinants of capital flows to emerging and advanced economies between 1990 and 2011," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(1), pages 17-48, April.
    6. Serena Masino, 2012. "Macroeconomic Instability and the Incentive to Innovate," Centre for Growth and Business Cycle Research Discussion Paper Series 167, Economics, The University of Manchester.
    7. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38830, University Library of Munich, Germany.
    8. repec:bla:rdevec:v:14:y:2010:i:s1:p:466-486 is not listed on IDEAS
    9. Masino, Serena, 2012. "Macroeconomic instability and the incentive to innovate," MPRA Paper 38766, University Library of Munich, Germany.
    10. Akçay Selçuk & Karasoy Alper, 2020. "Determinants of private investments in Turkey: Examining the role of democracy," Review of Economic Perspectives, Sciendo, vol. 20(1), pages 23-49, March.

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