ABSTRACT
This chapter presents a study which analyses the effects of real exchange rate volatility on investment in manufacturing sectors for countries under quasi-fixed and flexible exchange rate systems by answering the question, "In which system does real exchange rate volatility have negatively significant effects on sectoral investment?" The objective of this study was to test the effects of the levels and volatility of real exchange rates on investment at the sectoral level for open economies. Sectoral investment data used in this study is obtained from the OECD. This study is unique in using this data source for empirical study of sectoral investment behavior. In the empirical part of the study, the investment equations are estimated using investment in fixed assets, as well as investment in machinery and equipment for two- and three-digit ISIC manufacturing sectors. The empirical results of this study also support their predictions.
