Corporate investment and the real exchange rate

We examine the relationship between real exchange rate fluctuations and firm-level investment and growth using data for a sample of close to 33,000 firms from 68 advanced and emerging market countries over the 2000–2014 period. We show that real depreciations boost profits, investment, and asset growth of tradable sector firms that have higher labor shares and are relatively more financially constrained. These findings are consistent with an “internal financing channel” whereby depreciations boost profits by reducing real product wages, spurring investment of labor-intensive but financially-constrained firms. Our results are robust to controlling for alternative channels through which real exchange rates affect corporate investment, including via direct competitiveness gains, balance sheet mismatch, costs of imported intermediate inputs, and aggregate credit supply.