Real Exchange Rate Volatility and Employment: Role of External Sector Exposure

34 Pages Posted: 13 Feb 2015

See all articles by Anubha Dhasmana

Anubha Dhasmana

Indian Institute of Management (IIMB), Bangalore

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Date Written: February 13, 2015

Abstract

This paper studies the impact of real exchange rate volatility on firm level employment using a difference-in-difference model applied on a panel of 900 manufacturing firms. Trade exposure as measured by the difference between the shares of exports and imports in a firm’s total revenues and input costs respectively, emerges as an important determinant of firm’s response to higher exchange rate volatility. Firms with a positive trade exposure are found to experience a larger increase, or a smaller decrease, in employment growth than similar “non-exposed” firms in response to an increase in real exchange rate volatility. The impact of exchange rate volatility on employment is found to be non-linear in trade exposure. Finally, domestically owned firms respond differently to exchange rate shocks as compared to the foreign owned firms. Similarly, exporters respond differently to higher exchange rate volatility than the non-exporters.

Keywords: Real Exchange Rate Volatility, Trade Exposure

Suggested Citation

Dhasmana, Anubha, Real Exchange Rate Volatility and Employment: Role of External Sector Exposure (February 13, 2015). IIM Bangalore Research Paper No. 479, Available at SSRN: https://ssrn.com/abstract=2564427 or http://dx.doi.org/10.2139/ssrn.2564427

Anubha Dhasmana (Contact Author)

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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