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Do exchange rates affect the capital-labour ratio? Panel evidence from Canadian manufacturing industries

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  • Danny Leung
  • Terence Yuen

Abstract

Using industry-level data for Canadian manufacturing industries from 1981 to 1997, we find empirical evidence of a negative relationship between the capital-labour ratio and the user cost of capital relative to the price of labour. A 10% increase in the user cost of the Machinery and Equipment (M&E) relative to the price of labour results in a 3.3% decrease in the M&E-labour ratio in the long run. Assuming complete exchange rate pass-through into imported M&E prices, the maximum effect of a permanent 10% depreciation in the exchange rate is a 1.7% decline in the M&E-labour ratio. This result implies that the cumulative growth of the M&E-labour ratio during the 1991 to 1997 period would have been 2.3 percentage points higher had the dollar not depreciated. This may appear to be significant, but considering both M&E as a share of total capital and the capital share of nominal output are both approximately one-third, in terms of a simple growth accounting framework, the effect on labour productivity is small.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 42 (2010)
Issue (Month): 20 ()
Pages: 2519-2535

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Handle: RePEc:taf:applec:v:42:y:2010:i:20:p:2519-2535

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Cited by:
  1. Landon, Stuart & Smith, Constance E., 2009. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 813-835, September.
  2. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada.
  3. Tarek Harchaoui & Faouzi Tarkhani & Terence Yuen, 2005. "The Effects of the Exchange Rate on Investment: Evidence from Canadian Manufacturing Industries," Working Papers 05-22, Bank of Canada.

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