New research at the Bank of Israel: The heterogeneous impact of the exchange rate on companies in the manufacturing industries in Israel
The impact of fluctuations in the real exchange rate on total manufacturing exports is small and is not significantly different from zero, at least in the short term.
- The impact of fluctuations in the real exchange rate on total manufacturing exports is small and is not significantly different from zero, at least in the short term. The reason derives from the low impact of exchange rate fluctuation on the exports of large companies with high productivity, and because manufacturing exports from Israel are largely concentrated in a small group of such companies.
- Alongside this, the exchange rate impacts markedly on small companies characterized by low productivity. For these companies, a real appreciation of 1 percent is expected to lead to an average decline of 1.6–2 percent of exports.
- The real exchange rate also impacts on the scope of domestic sales of manufacturing companies exposed to competing imports from abroad.
- An exchange rate appreciation reduces the scope of investments by companies whose investments are oriented toward domestic products, such as R&D, but encourages investments by companies oriented toward investments in imported products. These effects are less significant for companies characterized by high productivity.
- As a result of these effects, the research finds that a real appreciation of 1 percent is expressed over approximately 2 years by an average decline of about 0.3 percent in the number of employee posts in manufacturing. The main impact on employment is focused on companies with low technological intensity that are exposed to competing imports from abroad.