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Investment response to exchange rate uncertainty: Evidence from Chinese exporters

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  • Zeng, Ting
  • Zhao, Wei
  • Liu, Zhengning

Abstract

This paper empirically examines the impact of exchange rate uncertainty on firm-level investment using data collected from the incidence of an exogenous uncertainty shock caused by the 2005 change in China's exchange rate policy. The results show that the higher RMB exchange rate uncertainty induced by the policy change significantly weakened Chinese exporters' response of investment to demand shocks. Moreover, exporters with higher degrees of capital irreversibility were found to be more sensitive to the uncertainty shock, which is consistent with the capital irreversibility hypothesis that has been identified in the macroeconomic literature. This paper also documents heterogenous investment responses to uncertainty across firms.

Suggested Citation

  • Zeng, Ting & Zhao, Wei & Liu, Zhengning, 2022. "Investment response to exchange rate uncertainty: Evidence from Chinese exporters," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 488-505.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:488-505
    DOI: 10.1016/j.iref.2022.02.015
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    More about this item

    Keywords

    Exchange rate; Uncertainty; Firm investment; International trade;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F30 - International Economics - - International Finance - - - General

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