How Does Activity in Manufacturing Sector Respond to Trade and Exchange Rate Shocks? Evidence from Trade-Openness and Import Penetration Thresholds

Abstract

What is the impact of imports by stage of production and the manufacturing sector investment growth? We find that the manufacturing sector output growth, investment growth and employment growth decline in response to positive shocks to the importation of capital and intermediate goods growth. This contrasts with the increase due to the importation of consumption goods. Furthermore, we find that the R/US$ exchange rate appreciations and depreciations propagate the impact of positive imports growth on activity in the manufacturing sector in different directions. In the absence of the R/US$ exchange rate appreciation, the manufacturing sector output growth, investment growth and employment growth responses to positive shocks to imports growth are lower compared to when this channel is inactive in the model. Hence, the results indicate that the exchange rate appreciation tends to amplify the responses of the manufacturing sector output growth, investment growth and employment growth to positive shocks to imports growth.