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.