Heterogeneous effects of foreign exchange appreciation on industrial output: Evidence from disaggregated manufacturing data

The Quarterly Review of Economics and Finance

47 Pages Posted: 2 Mar 2021

See all articles by Rodrigo Eduardo Bampi

Rodrigo Eduardo Bampi

Caixa Econômica Federal

Jefferson Colombo

Sao Paulo School of Economics (FGV EESP)

Date Written: December 7, 2020

Abstract

Real exchange rate fluctuations impact domestic economic activity throughout the trade and financial channels. Using granular data from the Brazilian manufacturing sector, we decompose the manufacturing sector into different sub-sectors according to their net exposures to international trade and analyze how the industrial production responds to real exchange rate appreciation innovations. On the aggregate level, our evidence suggests a non-significant role of the exchange rate in explaining the dynamics of industrial production, before and after the Great Financial Crisis of 2008. However, consistent with the trade channel of real exchange rates, we find that shocks to the exchange rate (e.g., an unanticipated depreciation) positively (negatively) affect output in net export (import) sectors. Though non-homogeneous, these effects are modest in terms of economic magnitude. Further, by including analysts’ macroeconomic forecasts in the model, we find that such effects stem from exogenous, unanticipated shocks to the exchange rate. Our evidence is robust to a trade-weighted measure of the exchange rate and to alternative manufacturing outcomes rather than output. Overall, our results highlight how heterogeneous are manufacturing responses to exchange rate shocks in an important emerging economy.

Keywords: Manufacturing production, Real exchange rate shocks, Heterogeneity in manufacturing production, International trade, Trade openness

JEL Classification: F41, F43

Suggested Citation

Bampi, Rodrigo Eduardo and Colombo, Jefferson, Heterogeneous effects of foreign exchange appreciation on industrial output: Evidence from disaggregated manufacturing data (December 7, 2020). The Quarterly Review of Economics and Finance, Available at SSRN: https://ssrn.com/abstract=3793755

Rodrigo Eduardo Bampi

Caixa Econômica Federal ( email )

SAUS Quadra 05, Bloco A
Brazilia, Distrito Federal 70070050
Brazil

Jefferson Colombo (Contact Author)

Sao Paulo School of Economics (FGV EESP) ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://eesp.fgv.br/integrante/jefferson-colombo

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