Agradecimentos: Carolina Troncoso Baltar gratefully acknowledges research funding granted by the São Paulo Research Foundation (FAPESP), while Gilberto Tadeu Lima gratefully acknowledges research funding provided by the Brazilian National Council of Scientific and Technological Development (CNPq). The authors are very much grateful to an anonymous referee and Alexandre Gori Maia for quite helpful comments and suggestions. The authors should also mention useful feedback received from participants at the 17th Conference of the Research Network Macroeconomics and Macroeconomic Policies, Berlin (Germany), 2013, the Workshop on Development Strategies: Country Studies and International Comparisons, Shanghai (China), 2013, and the 42o Encontro Nacional de Economia, Natal (Brazil), 2014. Any remaining errors are authors’ own Ver menos

Abstract: he purpose of this paper is to study the impact of the real exchange rate on investment in the Brazilian manufacturing industry. The authors develop an investment model that considers the effect of changes in the real exchange rate, taking into account that the effect of the real exchange rate on the Brazilian manufacturing investment operates through demand and cost channels. The composition of these effects varies across manufacturing sectors, with different repercussions on investment decisions, depending on sectoral characteristics. A panel data analysis is applied to estimate the model for the Brazilian manufacturing sectors from 1996 to 2010. One main result is that the responsiveness of the Brazilian manufacturing investment to real exchange rate varies considerably across manufacturing sectors. Overall, the results contribute to a better understanding of the relationship between exchange rate dynamics, manufacturing investment and industrial development, thus unveiling important empirical elements for the debate on industrial policies to stimulate manufacturing investment and production. As the (scant) empirical literature on real exchange rate and investment in Brazil has invariably been using aggregate data, this paper contributes to the literature by obtaining sectoral estimates of the responsiveness of manufacturing investment to exchange rate fluctuations that further the understanding of the complex relationship between these economic variables Ver menos