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Does exchange rate appreciation 'deindustrialize' the open economy? a critique of U.S. evidence

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Listed:
  • Reuven Glick
  • Michael M. Hutchison

Abstract

Since the fiscal expansion and real appreciation of the dollar in the early 1980s, widespread attention has focused on the so-called "deindustrialization" and "two-tiered" development of the U.S. economy. This view argues that exchange rate appreciation caused a major resource shift away from tradables production, such as manufactures, toward nontradables production in the economy. In this paper we take a critical look at this view. ; We argue that the association of a dollar appreciation with relative strength or weakness in the tradable goods sector depends on the particular shock causing the appreciation, and the extent to which it is exogenous or policy induced. This suggests that the relation between exchange rates and the sectoral composition of output is unlikely to be stable over time as the nature of underlying economic shocks varies. ; In analyzing the empirical support for the "two-tiered" hypothesis, we show that the negative association between dollar appreciation and tradable goods output is sample specific, and not stable over time. In empirical attempts to link U.S. sectoral output growth to underlying shocks, we cannot reject the hypothesis that tradables output is positively associated with fiscal stimulus.

Suggested Citation

  • Reuven Glick & Michael M. Hutchison, 1988. "Does exchange rate appreciation 'deindustrialize' the open economy? a critique of U.S. evidence," Working Papers in Applied Economic Theory 88-04, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfap:88-04
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    Cited by:

    1. John A. Tatom, 1995. "Currency Appreciation and ‘Deindustrialisation’: A European Perspective," The World Economy, Wiley Blackwell, vol. 18(4), pages 519-541, July.
    2. Bahmani-Oskooee Mohsen & Mirzaie Aghdas, 2000. "The Long-Run Effects of Depreciation of The Dollar on Sectoral Output," International Economic Journal, Taylor & Francis Journals, vol. 14(3), pages 51-61.
    3. Kandil, Magda & Mirzaie, Ida Aghdas, 2003. "The effects of dollar appreciation on sectoral labor market adjustments: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 89-117.
    4. Mohsen Bahmani-Oskooee & Ida A. Mirzaie & Ilir Miteza, 2007. "Sectoral Employment, Wages and the Exchange Rate: Evidence from the U.S," Eastern Economic Journal, Eastern Economic Association, vol. 33(1), pages 125-136, Winter.

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