Corporate Investment and the Real Exchange Rate

68 Pages Posted: 7 Dec 2018 Last revised: 23 Jun 2020

See all articles by Mai Dao

Mai Dao

International Monetary Fund (IMF)

Camelia Minoiu

Federal Reserve Board

Jonathan D. Ostry

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: June 22, 2020

Abstract

We examine the relationship between real exchange rate fluctuations and firm-level investment and growth using data for a sample of close to 33,000 firms from 68 advanced and emerging market countries over the 2000-2014 period. We show that real depreciations boost profits, investment, and asset growth of tradable sector firms that have higher labor shares and are relatively more financially constrained. These findings are consistent with an "internal financing channel" whereby depreciations boost profits by reducing real product wages, spurring investment of labor-intensive but financially-constrained firms. Our results are robust to controlling for alternative channels through which real exchange rates affect corporate investment, including via direct competitiveness gains, balance sheet mismatch, costs of imported intermediate inputs, and aggregate credit supply.

Keywords: corporate investment, labor share, real exchange rate, real effects of depreciation, financial constraints

JEL Classification: E21, E22, F31, G11, G31, G32

Suggested Citation

Dao, Mai and Minoiu, Camelia and Ostry, Jonathan D., Corporate Investment and the Real Exchange Rate (June 22, 2020). Available at SSRN: https://ssrn.com/abstract=3284171 or http://dx.doi.org/10.2139/ssrn.3284171

Mai Dao

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Camelia Minoiu (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jonathan D. Ostry

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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