The exchange rate and wages: How they affect capital investment

  • Author(s) / Creator(s)
  • This study, conducted by Stuart Landon and Constance E. Smith of the University of Alberta, aims to understand the critical factors influencing capital investment. The results show that, for the average country in the sample of 17 developed OECD economies (including Canada), a currency depreciation has significant negative effects on investment in physical capital, especially in services sectors. Real wage increases—that may arise from labour market rigidities, for example—have important negative consequences for investment in the medium and long run. Given the already well-documented evidence of the significance of investment for Canada’s future productivity and output growth, these findings suggest policies that generate movements in the exchange rate have important (perhaps unintended) consequences for industry investment, productivity and economic growth. Further, policies that increase the real wage costs of firms may also hinder investment and future growth.

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    ©2006 The Conference Board of Canada. This version of this article is open access and can be downloaded and shared. The original author(s) and source must be cited.
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    • Landon, S., & Smith, C.E. (2006). The exchange rate and wages: How they affect capital investment. The Conference Board of Canada, 2006(October), 1-20.
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