How do exchange rates affect environmental quality?

Abstract

Exchange rates are integral to explaining the environmental consequences of globalization because they govern the prices of imported inputs and the price competitiveness of exports and, consequently, firms' input use decisions, production levels and emissions. We study how exchange rates, foreign input sourcing and export orientation determine environmental outcomes across countries and industries in both theoretical and empirical contexts. For industries that rely intensively on imported intermediate inputs, a stronger domestic currency leads to higher emission intensities (emissions per unit of output), while the reverse holds for industries that export intensively. Our results thus show that exchange rates have implications for the environment that have heretofore remained unexplored.