ABSTRACT
Because the U.S. dollar remains the prime medium for international trade and investment, its value is a key variable in the world economy. The U.S. dollar exchange rate experienced huge swings in the 1980s, raising the question of the effects of large deviations from purchasing power parity on U.S. industries and firms. The nature and intensity of these effects gives rise to much controversy. Some economists, like Paul Krugman (1989), emphasize the inertia of trade flows in spite of the high volatility of exchange rates, considering that the swings in exchange rates “have had only muted effects on anything real” (Krugman, 1989, p. 37). For others, like Milberg and Gray (1992), the appreciation of the U.S. dollar (1980–1985) had long-lasting unfavorable effects on U.S. tradable-goods industries. Market shares were lost, but, above all, companies have been deprived of a significant amount of internal funds needed for sustained investment in vital areas like innovation, which has obstructed the main engine of growth. In other words, the temporary appreciation of the U.S. dollar had a long-lasting negative effect. This chapter investigates a crucial causal linkage of the latter thesis, and tests whether the operating profits achieved in U.S. tradable-goods industries are negatively correlated with the U.S. dollar appreciation of the early 1980s.
