The Heterogeneous Effect of the Exchange Rate on Firms in the Manufacturing Industries in Israel

15/06/2022 |  Barak Arnon, Brand Gilad
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Monetary Policy and Inflation

This study examines, through the use of a rich database that includes individual data at the firm level, the effect that changes in the real exchange rate of the Israeli shekel have on the economic activities of manufacturing firms in Israel. The use of such micro-data helps us to deal with the challenge of identification, as well as to distinguish between different heterogeneous effects. The results of this study show that an appreciation of one percent in the real exchange rate of the Shekel, leads, within 2 years, to a reduction of about 0.8 percent in the exports of a manufacturing firm (and vice versa with regard to a depreciation of the Shekel). This effect was found to be weaker among large firms and among firms with high productivity. Since the industrial exports in Israel are mostly concentrated within a small group of firms having these characteristics, the aggregate effect, at least in the short term, was found to be small. It was also found that the appreciation of the shekel reduces the domestic sales of a manufacturing firms, and this effect is stronger for large and high productivity firms, for which the exposure to competing imports is more significant. Investments are also affected by fluctuations in the exchange rate of the shekel. Companies with considerable investments in imports of machinery and equipment tend to be impacted positively by appreciation, while companies with marked investments in R&D are impacted negatively. As a result of these effects, the study found that a one percent appreciation of the shekel is reflected within two years in a decline of about 0.3 percent in employment in the manufacturing industries