The view that the strength of the dollar in the early 1980s was associated with
persistent restructuring of United States industry is supported by correlations
between exchange rate patterns and data on business formation, business failure
and sectoral investment in new plant and equipment. Short term trend
depreciations of the dollar are associated with reallocation of resources across
sectors, while longer term trend depreciations are associated with investment
expansions in many sectors of industry. Persistent exchange rate volatility is
strongly associated with investment contractions, with this effect weakest during
depreciation periods. This suggests a second order effect of depreciation trends:
during trend depreciation periods the negative and significant correlation between
exchange rate volatility and investment is reduced.
*Published:
"Exchange Rates and Investment in United States Industry", Review of Economics and Statistics, (November 1993) vol 75, no4, pp 575-588
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