ABSTRACT
This chapter presents an overview of the estimation results and econometric issues related to estimation procedure. It reports the estimation results for the countries in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). The estimation results support the hypothesis that real exchange rate volatility has negative and statistically significant effects on real investment in the manufacturing sectors of the countries in the flexible exchange rate system. The chapter also presents the estimation results for the two- and three-digit manufacturing sectors for Belgium, Denmark, France, Germany, Italy, Netherlands, Finland, Norway, United Kingdom, and United States. In the EMS countries, real exchange rate volatility has depressing effects on investment only in Germany, which has a large trade volume with non-EMS countries. Real interest rate volatility has depressing effects on investment in Denmark, France, Germany, and the United Kingdom.
