Working Paper

Does exchange rate appreciation 'deindustrialize' the open economy? a critique of U.S. evidence

Abstract: Since the fiscal expansion and real appreciation of the dollar in the early 1980s, widespread attention has focused on the so-called \"deindustrialization\" and \"two-tiered\" development of the U.S. economy. This view argues that exchange rate appreciation caused a major resource shift away from tradables production, such as manufactures, toward nontradables production in the economy. In this paper we take a critical look at this view. ; We argue that the association of a dollar appreciation with relative strength or weakness in the tradable goods sector depends on the particular shock causing the appreciation, and the extent to which it is exogenous or policy induced. This suggests that the relation between exchange rates and the sectoral composition of output is unlikely to be stable over time as the nature of underlying economic shocks varies. ; In analyzing the empirical support for the \"two-tiered\" hypothesis, we show that the negative association between dollar appreciation and tradable goods output is sample specific, and not stable over time. In empirical attempts to link U.S. sectoral output growth to underlying shocks, we cannot reject the hypothesis that tradables output is positively associated with fiscal stimulus.

Keywords: Foreign exchange; Dollar, American; Econometric models;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Papers in Applied Economic Theory

Publication Date: 1988

Number: 88-04