The impact of exchange rate misalignments on manufacturing investment in Brazil

MARCONI, NELSON; PORTO, TIAGO COUTO; ARAUJO, ELIANE

doi:10.1590/0101-31572022-3435

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Brazilian Journal of Political Economy

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Articles • Brazil. J. Polit. Econ. 42 (4) • Oct-Dec 2022 • https://doi.org/10.1590/0101-31572022-3435 copy

The impact of exchange rate misalignments on manufacturing investment in Brazil^* * Paper of the research project on the exchange rate and the current account in Latin America, financed by FAPESP.

O impacto dos desalinhamentos cambiais sobre o investimento industrial no Brasil

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

We analyze the hypothesis that variations on manufacturing investment are influenced by the difference between the real effective and industrial equilibrium exchange rates and by the difference between the current account and industrial equilibrium exchange rates (a proxy for the Dutch disease). The current account equilibrium exchange rate is defined as the rate that guarantees that the current account of a country is balanced intertemporally, and the industrial equilibrium exchange rate corresponds to the rate that makes competitive those companies producing internationally tradable non-commodities goods and services in the so-called state-of-art. First, the concepts and methodologies for estimating the current account and industrial equilibrium exchange rate are explained. Then, to test our hypothesis, a database for 24 Brazilian manufacturing sectors was built from 2007 to 2017. A dynamic panel data model was adopted to estimate the relationship between these currency misalignments and the manufacturing investment. The results suggest that the magnitude of those differences influences investment decisions, potentially contributing to economic growth and development.

KEYWORDS:
Real exchange rates; manufacturing investment.

	(1)	(2)	(3)	(4)	(5)	(6)	(7)
VARIABLES	Log of Investment	Log of Investment	Log of Investment	Log of Investment	Log of Investment	Log of Investment	Log of Investment

Log of Investment (-1)	0.284**	0.286**	0.347**	0.325**	0.312**	0.123	0.289**
	(0.111)	(0.116)	(0.151)	(0.140)	(0.128)	(0.098)	(0.138)
Log of Value Added (-2)	-0.043	0.048	0.480**	0.281**	0.299	0.079	0.070
	(0.111)	(0.124)	(0.244)	(0.129)	(0.185)	(0.186)	(0.159)
Log of (REER/IEER) (-3)	1.776***	1.035***	0.931*	1.141**	1.185**	1.570***	1.016**
	(0.476)	(0.400)	(0.502)	(0.562)	(0.535)	(0.479)	(0.474)
Log of Long-Term Interest Rate	-0.809***	-0.546***	-0.179	-0.525**	-0.408*	-0.798***	-0.489**
	(0.151)	(0.192)	(0.285)	(0.219)	(0.228)	(0.297)	(0.223)
Exchange Rate Volatility (Dummy)		-0.055*	-0.118**	-0.077*	-0.114***	-0.054	-0.076*
		(0.033)	(0.047)	(0.040)	(0.042)	(0.046)	(0.039)
Log of Net Exports Coefficient (-1)			0.287**
			(0.142)
Log of Import Penetration Coefficient (-2)				0.020
				(0.054)
Log of Profit Margin (-2)					-0.100
					(0.088)
Log of Labor Factor Intensity Index						-1.329**
						(0.574)
Log difference of Trade Openness (-1)							0.244
							(0.193)
Constant	-8.729**	-7.307***	-17.170***	-13.089***	-13.267***	-13.107***	-7.678**
	(3.698)	(2.671)	(4.968)	(3.656)	(4.657)	(3.882)	(3.582)

Observations	190	190	189	182	189	190	182
Number of Sectors	24	24	24	24	24	24	23
Number of Instruments	15	18	21	21	21	21	21
AR(2)	1.5	1.56	1.3	1.76	1.72	1.19	1.21
Prob > z	0.13	0.119	0.193	0.078	0.085	0.23	0.22
Hansen	10.77	12.15	19.57	16.68	17.21	11.91	15.63
Prob > chi2	0.37	0.43	0.14	0.27	0.24	0.61	0.33

	(1)	(2)	(3)	(4)	(5)	(6)	(7)
VARIABLES	Log of Investment	Log of Investment	Log of Investment	Log of Investment	Log of Investment	Log of Investment	Log of Investment

Log of Investment (-1)	0.274**	0.285**	0.359**	0.263***	0.312**	0.151	0.281**
	(0.109)	(0.114)	(0.154)	(0.102)	(0.136)	(0.096)	(0.135)
Log of Value Added (-2)	-0.015	0.070	0.297*	0.238**	0.262	0.090	0.091
	(0.069)	(0.121)	(0.154)	(0.107)	(0.167)	(0.181)	(0.141)
Log of (REER_CA/IEER) (-3)	1.477***	1.204**	0.994	1.473*	1.425**	1.899***	1.100*
	(0.453)	(0.570)	(0.970)	(0.793)	(0.703)	(0.642)	(0.667)
Log of Long-Term Interest Rate	0.032	0.012	0.221	0.199	0.205	0.063	0.048
	(0.176)	(0.152)	(0.328)	(0.227)	(0.178)	(0.184)	(0.205)
Exchange Rate Volatility (Dummy)		-0.048	-0.105*	-0.130***	-0.101**	-0.052	-0.072*
		(0.036)	(0.054)	(0.041)	(0.042)	(0.046)	(0.041)
Log of Net Exports Coefficient (-1)			0.251*
			(0.146)
Log of Import Penetration Coefficient (-2)				-0.033
				(0.055)
Log of Profit Margin (-2)					-0.112
					(0.081)
Log of Labor Factor Intensity Index						-1.460**
						(0.715)
Log difference of Trade Openness (-1)							0.213
							(0.174)
Constant	-7.673***	-8.345***	-13.005**	-13.248***	-13.207***	-14.670***	-8.311**
	(2.602)	(2.846)	(6.035)	(3.574)	(4.475)	(3.775)	(3.701)

Observations	190	190	189	182	189	190	182
Number of Sectors	24	24	24	24	24	24	23
Number of Instruments	15	18	21	21	21	21	21
AR(2)	1.44	1.5	1.24	1.85	1.58	1.16	1.25
Prob > z	0.15	0.13	0.21	0.064	0.11	0.24	0.21
Hansen	11.12	11.92	20.37	14.33	15.87	10.51	15.22
Prob > chi2	0.34	0.45	0.11	0.42	0.32	0.72	0.36

Variable	Acronym:	Source:
Investment / Output	Investment	INDSTAT4 - UNIDO
Value Added	VA	INDSTAT4 - UNIDO
Industrial Equilibrium Exchange Rate	icei	The variable calculation methodology for the industrial equilibrium exchange rate (IEER) is based on real unit labour costs in the manufacturing sector, according to the following formula:
		$I E E R_{i_{t}} = \frac{U L C_{i_{t}}}{\sum_{j}^{n} (U L C_{j_{t}} * p o n d_{i, j_{T}})}, i \neq j, w h e r e : U L C_{i_{t}} = \frac{W_{i_{t}}}{V A_{i_{t}}} = \frac{\frac{W_{i_{t}}}{L_{i_{t}}}}{\frac{V A_{i_{t}}}{L_{i_{t}}}} = \frac{ω_{i_{t}}}{ζ_{i_{t}}}$
		where ULC is the unit labour cost, W is the mass wages, VA is the added value, L is the number of employees, w is the average wage and z is the labour productivity (always in manufacturing). As the ratio between the two nominal variables (W and VA) becomes a real variable, the ULC s were calculated generally using nominal variables, sometimes replaced by real variables when the nominals were not available, but always making sure that the result was a real variable. When necessary, the series were deflated by the respective consumer price index. Source: CND-FGV, available at: https://eaesp.fgv.br/centros/centro-estudos-novo-desenvolvimentismo/projetos/taxa-cambio-equilibrio-industrial
Current Account Equilibrium Exchange Rate	reer_ca	Calculated in Bresser-Pereira et al. (2022Bresser-Pereira, L. C. et al. (2022) ‘The Current Account Equilibrium Exchange Rate: Methodology and estimations for LA countries’, Forthcoming at the Brazilian Journal of Political Economy., forthcoming)
Real Effective Exchange Rate	reer	CND-FGV, available at: https://eaesp.fgv.br/centros/centro-estudos-novo-desenvolvimentismo/projetos/taxa-cambio-equilibrio-industrial
dummy_volatility_reer	dummy_volatility_reer	Brazilian Central Bank (BCB). It is estimated based on the coefficient of variation of the Real Effective Exchange Rate. The number 1 was attributed to years that the Coefficient of Variation was higher than the average coefficient of variation for the years 2007 to 2017. The number Zero was attributed to years that the Coefficient of Variation was smaller than the average coefficient of variation for the years 2007 to 2017.
Import Penetration Coefficient	Penet_Imp	CNI
Net Export Coefficient	Coef_Exp_líq	CNI
Total Profit Margin	mt	Calculated by CND based on PIA-IBGE
Labor Factor Intensity Index	IFT	PIA-IBGE
Trade (imports + exports) (% of Output)	openess	ISDB - UNIDO
Long Term Interest Rate	tjlp	IPEADATA

	Number of Observations	mean	sd	min	max
Value Added (USD Million)	264	10900	9890	1020	51800
ICEI	264	104.16	6.20	95.75	113.83
REER_CA	264	91.78	4.20	87.43	101.59
REER	264	87.70	12.29	71.64	113.43
Net Export Coefficient	253	14.54	12.05	0.50	57.60
IFT	264	0.18	0.07	0.07	0.42
Openness to Trade	253	0.31	0.26	0.00	2.31
Total Profit Margin	264	7.21	6.24	-12.54	28.49
Investment Rate	264	0.16	0.14	-0.04	1.10
Long Term Interest rate	264	0.50	0.06	0.41	0.60
Import Penetration Coefficient	253	2.33	0.96	-0.36	3.78

Centro de Economia Política Rua Araripina, 106, CEP 05603-030 São Paulo - SP, Tel. (55 11) 3816-6053 - São Paulo - SP - Brazil
E-mail: cecilia.heise@bjpe.org.br

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[1] JEL Classification: E22; F31; L60.

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The impact of exchange rate misalignments on manufacturing investment in Brazil* * Paper of the research project on the exchange rate and the current account in Latin America, financed by FAPESP.

O impacto dos desalinhamentos cambiais sobre o investimento industrial no Brasil

ABSTRACT

The impact of exchange rate misalignments on manufacturing investment in Brazil^* * Paper of the research project on the exchange rate and the current account in Latin America, financed by FAPESP.