Investment, pass-through, and exchange rates: A cross-country comparison

Using detailed data from the United States, Canada, the United Kingdom, and Japan, we examine the implications of exchange rates for time series of se ctoral investment. Both theoretically and empirically, we show that investm ent responsiveness to exchange rates varies over time, positively in relati on to sectoral reliance on export share and negatively with respect to the share of imported inputs in production. Important differences exist in inve stment endogeneity across high- and low-price-over-cost markup sectors, wit h investment in low-markup sectors often significantly more responsive to e xchange rates. Cross-country differences in investment response are only pa rtially explained by industrial organization arguments.