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Abstract This study empirically investigates the influence exerted by the real exchange rate (RER) on investments in 81 sectors of Brazil’s manufacturing industry, between 2007 and 2018. The work has a number of novel features. First, a more disaggregated database is employed than that commonly found in the existing literature. Second, the article’s empirical findings indicate the existence of two competing channels through which a competitive RER may influence sectoral investments, that is: (i) positively, by enhanced exports and (ii) negatively, via more expensive imported inputs. Third, our empirical results also indicate that the RER’s influence is more significant in sectors with a lower mark-up, which means that a competitive RER—caused by expanding revenues from exports, offsets a lack of internal funds to finance new investments. Fourth, we tested the existence of an import penetration channel. The results reveal that a competitive RER increases investments as consumers substitute imported goods with domestic ones.
Pereira et al. (Fri,) studied this question.