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Relative Prices, Hysteresis, and the Decline of American Manufacturing

Listed author(s):
  • Douglas L. Campbell

    ()

    (New Economic School (NES))

This study uses new measures of real exchange rates to study the collapse of US manufacturing employment in the early 2000s in historical and international perspective. To identify a causal impact of RER movements on manufacturing, I compare the US experience in the early 2000s to the 1980s, when large fiscal deficits led to a sharp appreciation of the dollar, and to Canada’s experience in the mid-2000s, when high oil prices and a falling US dollar led to an equally sharp appreciation of the Canadian dollar. Using disaggregated sectoral data and a difference-in-difference methodology, I find that an appreciation in relative unit labor costs for the US led to disproportionate declines in employment, output, investment, and productivity in relatively more open manufacturing sectors. I also find that the impact of a temporary shock to real exchange rates is surprisingly long-lived (evidence of hysteresis), and that the appreciation of US relative unit labor costs can plausibly explain more than two-thirds of the decline in manufacturing employment in the early 2000s.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0212.

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Length: 65 pages
Date of creation: Mar 2016
Handle: RePEc:cfr:cefirw:w0212
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