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[2012-4] Substitution and Income Effects of a Rise in the Exchange Rate on Consumption and Investment

International Department (International Finance Research Team(+82-2-759-5970, 5962, 5745)) 2012.05.10 1747

 A rise in a country’s exchange rate enhances price competitiveness of its products, leading to an increase in its exports and a decrease in its imports, consequently often improving its GDP. For this reason, a rise in a country’s exchange rate has been traditionally seen to be positive for the nation’s economy. However, research findings indicate that a rising exchange rate may cause a decline in real purchasing power and an increase in corporate costs, which dampens a country’s consumption and investment.

 

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