The Role of the Exchange Rate on Investment Growth in the Mining Sector: Evidence from the Balance Sheet Hypothesis

Abstract

Is there a balance sheet channel transmitting negative shocks to mining commodity prices and exchange rate depreciations into the mining sector investment, foreign debt and intermediate imports? Evidence in this chapter indicates that mining investment declines and remains depressed in response to a real exchange rate depreciation shock. The real exchange rate depreciation shocks are transmitted more via the balance sheet items of foreign debt and the importation of intermediate goods which are largely representative of inputs to the production process and investment. Are the responses of investment, foreign debt and intermediate imports different to a decline in mining commodity prices? We find that investment growth and foreign debt are more responsive to a decline in commodity prices. The results affirm the centrality of the balance sheet channel in transmitting negative shocks to commodity prices demand for mining commodities and exchange rate depreciation shocks.