The response of industry employment to exchange rate shocks: evidence from panel cointegration

Abstract

This study investigates the long-run relationship between employment and exchange rate shocks at the industry level for France. Using panel unit roots and panel cointegration analysis, it is found that the French industries are quite sensitive to exchange rate changes. The estimated long-run elasticities reveal that exchange rates do influence industry employment in the expected way, that is, real appreciations are associated with decline in manufacturing for all industries in the sample.

Acknowledgements

The authors would like to thank one anonymous referee for her/his useful suggestions, which resulted in an improved version of the paper. The usual disclaimer applies. The authors would like to thank Peter Pedroni for kindly providing his program procedures that could easily be modified to calculate test statistics for panel unit roots and panel cointegration.

Notes

¹ For more application and tests for panel cointegration see also McCoskey (2002), Chakrabarti (2003), Drine and Rault (2003), Christopoulos (2004), Harb (2004), and Hatemi-J and Irandoust (2004).

² Equation 5 is estimated in the absence of adjustment costs due to the fact that the nature of such costs is not known. However, Burgess and Knetter (1998) introduce quadratic adjustment costs to the employment decision.

³ It should be pointed out that it is possible to add individual constant and trend terms in Equation 9.

⁴ For more details see Pedroni (1999).