PRIVATE INVESTMENT IN LATIN-AMERICA

This article analyzes private investment in Latin America and explores its response to instability, to growth, and to real exchange rate depreciation. Section 2 addresses the theoretical issue of the relationship between the real exchange rate and the real price of capital. It uses a model of a small open economy with a crawling peg to discuss the dynamics of both the real price of capital and the real exchange rate in response to a deterioration in the terms of trade. With a nominal exchange rate rule fixed by the central bank, a deterioration in the terms of trade leads to an immediate decline of the real price of capital, followed by a depreciating real exchange rate while the real price of capital slowly recovers. Section 3 further explores the role of the terms of trade in determining investment. Section 4 offers a regression analysis of the determinants of private investment in Latin America. It explores the relationships among investment, the real exchange rate, and the terms of trade. The regressions use quadrennial panel data for the period 1970-85 in Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela. The real exchange rate and the real rate of depreciation have no significant role in determination of private investment in the regressions. -from Author