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The Real Exchange Rate, Exports, and Manufacturing Profits: A Theoreti- cal Framework With Some Empirical Support

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  • Richard H. Clarida

Abstract

This paper investigates the relationship between manufacturing profits, exports, and the real exchange rate. Using Harston's (1990) model of pricing-to-market, we derive a co-integrated log-linear profits equation that restricts the long-run relationship among real U.S. manufacturing profits, domestic sales, the real exchange rate, real unit costs, the U.S. relative price of output, and foreign sales. We show that the elasticity of real profits with respect to the real exchange rate is bounded below by the product of (i) 1 minus the long-run pass-through coefficient and (ii) the ratio of export revenues to total profits. Our empirical findings suggest that, even after taking into account output, costs, and relative prices, real exchange rate fluctuations have a sizable and statistically significant influence on real U.S. manufacturing profits. The framework developed in this paper appears to be of some value in directing attention towards a heretofore underappreciated channel through which real exchange rate changes can potentially influence national savings.

Suggested Citation

  • Richard H. Clarida, 1991. "The Real Exchange Rate, Exports, and Manufacturing Profits: A Theoreti- cal Framework With Some Empirical Support," NBER Working Papers 3811, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3811
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    1. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August.
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    Cited by:

    1. Jen Baggs & Eugene Beaulieu & Loretta Fung, 2010. "Are Service Firms Affected By Exchange Rate Movements?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 156-176, June.
    2. Garcia-Herrero, Alicia & Koivu, Tuuli, 2007. "Can the chinese trade surplus be reduced through exchange rate policy?," BOFIT Discussion Papers 6/2007, Bank of Finland Institute for Emerging Economies (BOFIT).
    3. Kazimierz Stanczak, 1992. "Devaluations and Revaluations Without Capital Mobilityand PPP," UCLA Economics Working Papers 663, UCLA Department of Economics.
    4. Garcia-Herrero, Alicia & Koivu, Tuuli, 2007. "Can the chinese trade surplus be reduced through exchange rate policy?," BOFIT Discussion Papers 6/2007, Bank of Finland, Institute for Economies in Transition.
    5. Richard H. Clarida & Susan Hickok, 1993. "US Manufacturing and the Deindustrialisation Debate," The World Economy, Wiley Blackwell, vol. 16(2), pages 173-192, March.

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