| Abstract: |
Using industry-level data for 22 Canadian manufacturing industries, the
authors examine the relationship between exchange rates and investment during
the period 1981-97. Their empirical results show that the overall effect of
exchange rates on total investment is statistically insignificant. Further
investigation reveals the non-uniform investment response to exchange rate
movements in three channels. First, it is important to distinguish between
environments that have low and high exchange rate volatilities. Through
changes in output demands, depreciations would have a positive effect on total
investment when the exchange rate volatility is low. Yet, this stimulative
effect becomes considerably smaller as the volatility increases. Second, these
results for total investment are mainly due to movements in other machinery
and equipment, and not to investment in information technology and structures.
Third, investment in industries with low markup ratios are more likely to be
affected by exchange rate movements. |