Exchange-Rate-Investment Link: Industry-Level Evidence for OECD Countries
Exchange-Rate-Investment Link: Industry-Level Evidence for OECD Countries

Summary/Abstract: This study investigates whether investment reacts differently to exchange rate movements across industries. Using a broad panel of OECD countries including both advanced and emerging economies, we estimate the impact of exchange rate levels and volatility on sectoral investment. To this end, two disaggregated datasets are employed: Total investment across 10 major industries and manufacturing investment across 10 manufacturing sub-sectors. We estimate investment equations for aggregate investment as well as individual sectors employing Pooled Mean Group method which enables us to identify short and long run effects and account for country heterogeneity. The results show that changes in the level and volatility of exchange rates affect sectoral investment mainly in the long run. Higher exchange rate volatility generally reduces investment in most of the industries. However, the effect of exchange rate levels varies considerably across sectors. Real depreciations tend to lower sectoral investment, except for Manufacturing and Services sectors. While a weaker currency boosts investment in aggregate manufacturing, it has no significant long-run effect on most service industries. Within manufacturing, depreciation reduces investment in low-technology industries but supports investment in medium- and high-technology sectors.

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