The real exchange rate and industrial investment: new evidence for Brazil.

This study examines the impact of the real exchange rate (RER) on investment across 81 sectors of Brazil's manufacturing industry from 2007 to 2018, using a detailed sectoral database and dynamic panel data methods. It identifies three channels through which a competitive RER influences investment: positively via increased exports and import penetration (substitution of imported goods with domestic products), and negatively via higher costs of imported inputs. The findings show that the positive effect of a competitive RER on investment is stronger in sectors with lower mark-ups, which are more reliant on external financing, while sectors with higher mark-ups also benefit from gains in market share. The study highlights that Brazil's manufacturing sectors generally face challenges due to deindustrialisation and regressive specialisation, characterized by low export engagement and high import dependence, suggesting that exchange rate policy should be complemented by developmentalist measures to modernize and industrialize the production structure.