Abstract
This paper contributes to the literature on the nexus between production and exchange rate in the United States (U.S.) by considering non-linear adjustments of exchange rate effects on industrial production in several sectors of the U.S. economy. We employ a Non-linear Autoregressive Distributed Lags (NARDL) model which is built upon the Solow model. We show that there exists a non-linear relationship between these two variables in some of the MMIGs. We document short-run non-linear effects of exchange rate on production of non-energy materials, durable manufacturing, consumer goods and business equipment. The short-run effects last into the long-run for all the sectors. While exchange rate changes have short-run linear effects on production of electricity in the U.S., there are no effects of exchange rate movements on the production of mining, and energy materials. Moreover, the paper finds misspecification error of the model for the case of durable manufacturing. The existence of non-linearities considering import content of exports, support our hypothesis and conclusions. Further, the factors that influence demand provide justifications for our results.
Highlights
Studying the production of U.S industries have taken on new importance in the context of the U.S economy
We find that (1) USD exchange rate appreciation and depreciation both have positive effects on the production of non-energy materials with a significant but not high import content of exports, the amount of effect for appreciation is higher than that of depreciation (2) the exchange rate appreciation has positive effects on production in the sectors with high import content of exports, (3) the exchange rate depreciation has positive long-run effects on production of consumer goods with close to 0 import content of exports, (4) the exchange rate changes do not play a significant role in the production of sectors that their output prices are controlled by other factors or demands are price inelastic
This paper argues that the use of effective exchange rate is a better measure in this era of globalisation where various stages of production are outsourced from a chain of countries (OECD 2019)
Summary
Studying the production of U.S industries have taken on new importance in the context of the U.S economy. Exchange rate changes impact the production level of industries through trade channel effects and variation of the prices of inputs and outputs. Production is a building brick of an economy, makes industrial production index (IPI) essential for the U.S capital market as well. The presence of a positive and significant relationship between the Dow Jones index and IPI in the U.S has been recognised in the literature (Jareño and Negrut 2016). Movement in Dow Jones exhibits the movement of the largest publicly traded companies in the U.S IPI works as a benchmark of how the U.S capital market performs. The present study provides an empirical analysis to find out the impact of USD exchange rate on the production of selected U.S sectors. By considering the non-linearities, our analysis is intended to capture
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