The seminar will be held in the Visitor Centre at 3:15 pm.
Philippe Martin (Sciences-Po and CEPR)
Abstract
This paper analyzes the reaction of exporters to exchange rate changes. We show that, in the presence of distribution costs in the export market, high and low productivity firms react very differently to a depreciation . Whereas high productivity firms optimally raise their markup rather than the volume they export, low productivity firms choose the opposite strategy. This heterogeneity has important consequences for the aggregate impact of exchange rate movements. The presence of fixed costs to export means that only high productivity firms can export, firms which precisely react to an exchange rate depreciation by increasing their export price rather than their sales. We show that this heterogeneity can explain the weak effect of exchange rate movements on aggregate export volumes. We then test the main predictions of the model on a very rich French firm level data set with destination-specific export values and volumes on the period 1995-2005. Our results confirm that high performance firms react to a depreciation by increasing their export price rather than their export volume. The reverse is true for low productivity exporters. Another result consistent with our theoretical framework is that the probability of firms to enter the export market following a depreciation increases. However, the extensive margin response to exchange rate changes is small at the aggregate level because firms that enter, following a depreciation, are less productive and smaller relative to existing firms