Working Paper: NBER ID: w3811
Authors: Richard H. Clarida
Abstract: This paper investigates the relationship between manufacturing profits, exports, and the real exchange rate. Using Harston's (1990) model of pricing-to-market, we derive a co-integrated log-linear profits equation that restricts the long-run relationship among real U.S. manufacturing profits, domestic sales, the real exchange rate, real unit costs, the U.S. relative price of output, and foreign sales. We show that the elasticity of real profits with respect to the real exchange rate is bounded below by the product of (i) 1 minus the long-run pass-through coefficient and (ii) the ratio of export revenues to total profits. Our empirical findings suggest that, even after taking into account output, costs, and relative prices, real exchange rate fluctuations have a sizable and statistically significant influence on real U.S. manufacturing profits. The framework developed in this paper appears to be of some value in directing attention towards a heretofore underappreciated channel through which real exchange rate changes can potentially influence national savings.
Keywords: real exchange rate; manufacturing profits; exports; cointegration
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real exchange rate fluctuations (F31) | real U.S. manufacturing profits (N62) |
| 10 percent real depreciation of the dollar (F31) | greater than 6 percent rise in real profits of U.S. manufacturers (N12) |
| real depreciation (F31) | increase in export volumes (F10) |
| real exchange rate changes (F31) | impact on national savings (E21) |