Investment, GNP, and real exchange rates

The value of the U.S. dollar varied widely over the 1963- 1986 time period. Those same years witnessed several cyclical expansions and contractions and even wider swings in aggregate fixed investment rates. One explanation for some of the investment rate swings is the dramatic movements in exchange rates over this period. In this article, I use newly constructed capital stock and investment series for 270 U.S. manufacturing industries to examine investment responsiveness to changes in real exchange rates for 1963-1986. My research shows that investment rates are sensitive to real exchange rate movements and that appreciation of the U.S. dollar is associated with a decrease in industry investment rates—particularly in durable goods industries. Analysis of industries for which imports-sales data are available further suggests that investment is more responsive in industries with greater exposure to foreign competition. Finally, I document the existence of substantial interindustry variation in the influence of real exchange rates on investment. My results are broadly consistent with international trade models in which changes in real exchange rates drive changes in the relative competitiveness of domestic and foreign industries.