The Time-Variation of the Exchange-Rate Exposure: An Industry Analysis

Abstract

This paper examines the time-variation of the exposure of monthly U.S. manufacturing industry returns (at the 4-digit SIC level) to exchange rate movements. We argue that the lack of signi cant evidence of exchange-rate exposure documented in the literature is due to the assumption that exchange-rate exposure is constant. We reject the hypothesis that industry exchange-rate exposure is constant; in contrast, we nd evidence that exposure is time-varying and that this time-variation is driven by the monthly share of imports and exports in total industry production. In line with predictions of various theoretical models, we nd that an appreciation of the dollar reduces the value of an industry through exports and increases the value of an industry through imports between 1978 and 1986. On average, during this period, a 1% appreciation of the dollar reduces the value of an industry through exports by 0.46% and increases its value through imports by 0.37%, and hence in total, reduces its value by 0.09%. Finally, the level at which exposure is examined matters; our ndings indicate that signi cant exposure at the 4-digit SIC level is often masked at the more aggregate 2-digit level.

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