Vol. 42 No. 4 (2022)
How to Cite
The impact of exchange rate misalignments on manufacturing investment in Brazil
Abstract
We analyze the hypothesis that variations on manufacturing investment are
influenced by the difference between the real effective and industrial equilibrium exchange
rates and by the difference between the current account and industrial equilibrium exchange
rates (a proxy for the Dutch disease). The current account equilibrium exchange rate
is defined as the rate that guarantees that the current account of a country is balanced
intertemporally, and the industrial equilibrium exchange rate corresponds to the rate that
makes competitive those companies producing internationally tradable non-commodities
goods and services in the so-called state-of-art. First, the concepts and methodologies for
estimating the current account and industrial equilibrium exchange rate are explained. Then,
to test our hypothesis, a database for 24 Brazilian manufacturing sectors was built from
2007 to 2017. A dynamic panel data model was adopted to estimate the relationship between
these currency misalignments and the manufacturing investment. The results suggest that the
magnitude of those differences influences investment decisions, potentially contributing to
economic growth and development.
JEL Classification: E22; F31; L60.
Keywords: Real exchange rates manufacturing investment