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The impact of exchange rate misalignments on manufacturing investment in Brazil

Author

Listed:
  • Nelson Marconi
  • Tiago Couto Porto
  • Eliane Araujo

Abstract

We analyze the hypothesis that variations on manufacturing investment areinfluenced by the difference between the real effective and industrial equilibrium exchangerates and by the difference between the current account and industrial equilibrium exchangerates (a proxy for the Dutch disease). The current account equilibrium exchange rateis defined as the rate that guarantees that the current account of a country is balancedintertemporally, and the industrial equilibrium exchange rate corresponds to the rate thatmakes competitive those companies producing internationally tradable non-commoditiesgoods and services in the so-called state-of-art. First, the concepts and methodologies forestimating the current account and industrial equilibrium exchange rate are explained. Then,to test our hypothesis, a database for 24 Brazilian manufacturing sectors was built from2007 to 2017. A dynamic panel data model was adopted to estimate the relationship betweenthese currency misalignments and the manufacturing investment. The results suggest that themagnitude of those differences influences investment decisions, potentially contributing toeconomic growth and development. JEL Classification: E22; F31; L60.

Suggested Citation

  • Nelson Marconi & Tiago Couto Porto & Eliane Araujo, 2022. "The impact of exchange rate misalignments on manufacturing investment in Brazil," Brazilian Journal of Political Economy, Center of Political Economy, vol. 42(4), pages 853-875.
    • Handle: RePEc:ekm:repojs:v:42:y:2022:i:4:p:853-875:id:2367
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    More about this item

    Keywords

    Real exchange rates; manufacturing investment;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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