On the link between the real exchange rate and domestic investment in Asia: Are there asymmetric effects?

Abstract

Previous research that assessed the asymmetric impact of currency depreciation on domestic investment considered experiences of seven industrialized countries, six emerging economies, and eighteen countries from Africa. We add to this new literature by considering the experiences of eight Asian countries. Like previous studies, our asymmetric analysis that required estimating nonlinear models revealed much more significant outcome than the linear and symmetric models. It predicted short-run asymmetric effects of exchange rate changes on domestic investment in all eight countries that lasted into long-run asymmetric effects in Hong Kong, Indonesia, South Korea, Malaysia, and Singapore. Additional analysis revealed that currency depreciation has adverse long-run effects on domestic investment in all five countries.

Keywords:

• Asian countries
• domestic investment
• real exchange rate
• asymmetry analysis

JEL Classification:

• F31

Notes

1 Bahmani-Oskooee and Ratha (2004) and Bahmani-Oskooee and Hegerty (2010) are the latest review of J-curve literature.

2 For the asymmetric effects of exchange rate changes on import and export prices, see Elbejaoui and Jihene (2013), on domestic price level see Delatte and Lopez-Villavicencio (2012), on firm-level output see Dhasmana (2015), and on aggregate domestic output see Bahmani-Oskooee and Mohammadian (2018).

3 Note that by way of construction, a decline in the real effective exchange rate implies a depreciation of the domestic currency.

4 By deduction, they are equivalent. We can see this if we solve (1) for the error term and lag the solution by one period.

5 This is known as normalization.

6 Bahmani-Oskooee (2020) has demonstrated that the t test in this context is the same as the t test for testing the significance of the lagged error-correction term in the Engle and Granger (1987) approach. Hence, the estimate of θ₀ must also be negative if variables are to converge toward their long-run equilibrium values.

7 Shin et al. (2014, p. 291) even argue that when we move from the linear to the nonlinear model, the critical values of the F test should stay at the same level.

8 This is known as the short-run cumulative or impact asymmetric effect.

9 For some other applications see Apergis and Miller (2006), Arize et al. (2017), Halicioglu (2007, Halicioglu 2008), Nusair (2012, Nusair 2017), Gogas and Pragidis (2015), Durmaz (2015), Baghestani and Kherfi (2015), Al-Shayeb and Hatemi-J (2016), Lima et al. (2016), Lima et al. (352016), Aftab, Syed, and Katper (2017), and Gregoriou (2017).

10 Full information estimates of both models for each country are available from corresponding author upon request. These were included in the original submission.

Additional information

Notes on contributors

Mohsen Bahmani-Oskooee

Mohsen Bahmani-Oskooee is a University Distinguished Professor and Patricia and Harvey Wilmeth Professor of Economics at the University of Wisconsin–Milwaukee. He is also the director of the Center for Research on International Economics at the same institution. He has published extensively in international finance and open economy macroeconomics including papers in the Journal of Political Economy, the Review of Economics and Statistics, Journal of Development Economics, Economic Development and Cultural Change, Southern Economic Journal, etc. He currently serves as the editor of the Journal of Economic Studies.

Sujata Saha

Sujata Saha is an assistant professor of economics at Wabash College in the United State. She has published articles in such journals as Journal of Economic Studies (2015), International Review of Economics and Finance (2016), Global Finance Journal (2016), Contemporary Economic Policy (2017), The World Economy (2017), etc.