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The Effects of the Exchange Rate on Investment: Evidence from Canadian Manufacturing Industries

Author

Listed:
  • Tarek Harchaoui
  • Faouzi Tarkhani
  • Terence Yuen

Abstract

Using industry-level data for 22 Canadian manufacturing industries, the authors examine the relationship between exchange rates and investment during the period 1981-97. Their empirical results show that the overall effect of exchange rates on total investment is statistically insignificant. Further investigation reveals the non-uniform investment response to exchange rate movements in three channels. First, it is important to distinguish between environments that have low and high exchange rate volatilities. Through changes in output demands, depreciations would have a positive effect on total investment when the exchange rate volatility is low. Yet, this stimulative effect becomes considerably smaller as the volatility increases. Second, these results for total investment are mainly due to movements in other machinery and equipment, and not to investment in information technology and structures. Third, investment in industries with low markup ratios are more likely to be affected by exchange rate movements.

Suggested Citation

  • Tarek Harchaoui & Faouzi Tarkhani & Terence Yuen, 2005. "The Effects of the Exchange Rate on Investment: Evidence from Canadian Manufacturing Industries," Staff Working Papers 05-22, Bank of Canada.
    • Handle: RePEc:bca:bocawp:05-22
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rates; Domestic demand and components;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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