Investment under uncertainty: asymmetric responses to exchange rate and volatility in the G7 countries
Salah A. NusairPurpose
This study aims to examine the symmetric and asymmetric effects of exchange rate changes and exchange rate volatility on domestic investment in G7 economies. It investigates whether currency appreciations and depreciations and increases and decreases in volatility exert differential short-run and long-run effects on investment.
Design/methodology/approach
Using quarterly data from 1973Q1–2024Q4, the study applies linear autoregressive distributed lag (ARDL) and nonlinear ARDL (NARDL) models. The NARDL framework captures asymmetries by decomposing exchange rate changes and volatility into positive and negative components. Volatility is measured using generalized autoregressive conditional heteroskedasticity (1,1), with robustness checked using an eight-quarter rolling standard deviation. Structural breaks are controlled through country-specific dummy variables.
Findings
Linear ARDL results show that exchange rate changes affect short-run investment in most G7 economies, with long-run effects in Canada, Germany, the UK and the USA. Volatility reduces long-run investment in France, Japan and the USA. NARDL results reveal significant short- and long-run asymmetries. Appreciations raise investment in Canada but reduce it in France and Japan, while depreciations lower investment in Germany, the UK and the USA but increase it in Italy. Rising volatility boosts investment in Japan and the UK but reduces it in France and the USA. These findings are robust to alternative volatility measures.
Originality/value
This study is the first to jointly model exchange rate and volatility asymmetries within a unified NARDL framework for the G7. Extending the sample through 2024 and confirming robustness across alternative volatility measures provides more comprehensive evidence than single-channel studies.