Corporate Investment and the Real Exchange Rate
55 Pages Posted: 7 Dec 2018
Date Written: November 12, 2018
We examine the relationship between real exchange rate depreciations and firm-level investment and growth using data for a sample of more than 30,000 firms from 66 advanced and emerging market countries over the 2000-2011 period. We show that depreciations boost profits, investment, and asset growth of tradable goods producing firms that are relatively financially-constrained and have higher labor shares. These findings are consistent with the view that depreciations boost internal financing opportunities by reducing real product wages, thereby spurring investment. We show that these effects on firm performance are enduring, including in the market valuation of firms.
Keywords: corporate investment, labor share, real exchange rate, real effects of depreciation
JEL Classification: E21, E22, O4
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