Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence From U.S. Manufacturing Industries
Abstract
This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.
ABSTRACT Weestimatethe impactofprice uncertaintyon investment usinga panelofU.S. manufacturing industries. When we pool the data for all industries, uncertainty has no impact on current investment. However, this pooled estiimate conceals an interesting difference across industries. For industries with a high degree of productmarketcompetition, the estimated impact is negative, reasonably large, and significantlydifferent from zero. For relatively non-competitive industries, the impact is always small and not significantly different from zero. The finding ofa negative relationship between investment and price uncertainty in competitive industries is broadlyconsistentwith the predictions ofmodels that incorporate irreversibility ofcapital investment.
Cite this document
Vivek Ghosal and Prakash Loungani (1995). Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence From U.S. Manufacturing Industries (IFDP 1995-517). Board of Governors of the Federal Reserve System, International Finance Discussion Papers. https://whenthefedspeaks.com/doc/ifdp_1995-517
@techreport{wtfs_ifdp_1995_517,
author = {Vivek Ghosal and Prakash Loungani},
title = {Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence From U.S. Manufacturing Industries},
type = {International Finance Discussion Papers},
number = {1995-517},
institution = {Board of Governors of the Federal Reserve System},
year = {1995},
url = {https://whenthefedspeaks.com/doc/ifdp_1995-517},
abstract = {This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.},
}