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Relative Prices, Hysteresis, and the Decline of American Manufacturing

Douglas Campbell ()

No w0212, Working Papers from Center for Economic and Financial Research (CEFIR)

Abstract: This study uses new measures of real exchange rates to study the collapse of US manufacturing employment in the early 2000s in historical and international perspective. To identify a causal impact of RER movements on manufacturing, I compare the US experience in the early 2000s to the 1980s, when large fiscal deficits led to a sharp appreciation of the dollar, and to Canada’s experience in the mid-2000s, when high oil prices and a falling US dollar led to an equally sharp appreciation of the Canadian dollar. Using disaggregated sectoral data and a difference-in-difference methodology, I find that an appreciation in relative unit labor costs for the US led to disproportionate declines in employment, output, investment, and productivity in relatively more open manufacturing sectors. I also find that the impact of a temporary shock to real exchange rates is surprisingly long-lived (evidence of hysteresis), and that the appreciation of US relative unit labor costs can plausibly explain more than two-thirds of the decline in manufacturing employment in the early 2000s.

Keywords: Exchange Rates; American Manufacturing; Hysteresis; Trade (search for similar items in EconPapers)
JEL-codes: F10 F16 L60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2016-03
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http://www.cefir.ru/papers/WP212.pdf (application/pdf)

Related works:
Working Paper: Relative Prices, Hysteresis, and the Decline of American Manufacturing (2013) Downloads
Working Paper: Relative Prices, Hysteresis, and the Decline of American Manufacturing (2013) Downloads
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