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A Note on the Investment-Enhancing Effect of a Depreciated Real Exchange Rate
Finders Business School, Flinders University, Adelaide, Australia
- 1 Finders Business School, Flinders University, Adelaide, Australia
Theoretical Economics Letters·Volume 05 (2015)·Pages 19–23·Published 13 January 2015·DOI10.4236/tel.2015.51004
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Abstract
This paper presents a mechanism through which a depreciated real exchange rate can lead to a higher investment rate. In an intertemporal framework, it shows that a depreciated real exchange rate can make the tradable sector more profitable and thus a greater requirement for capital. Moreover, the investment-enhancing effect of a depreciated real exchange rate decreases in magnitude when there is higher adjustment cost of investment.
KeywordsReal Exchange RateDepreciationCapital AccumulationAdjustment Cost of Investment
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