How Do Different Exporters React to Exchange Rate Changes? Theory, Empirics and Aggregate Implications

45 Pages Posted: 17 Nov 2009

See all articles by Nicolas Berman

Nicolas Berman

Graduate Institute of International and Development Studies (IHEID)

Phillipe Martin

Institut d'Etudes Politiques de Paris (Sciences Po)

Thierry Mayer

Université Paris I Panthéon-Sorbonne - TEAM; Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris; Centre for Economic Policy Research (CEPR)

Date Written: October 2009

Abstract

This paper analyzes the reaction of exporters to exchange rate changes. We present a model where, in the presence of distribution costs in the export market, high and low productivity firms react 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. Hence, pricing to market is both endogenous and heterogenous. 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 selection effect can explain the weak impact 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. Pricing to market by exporters is also more pervasive in sectors and destination countries with higher distribution costs. Consistent with our theoretical framework, we show that the probability of firms to enter the export market following a depreciation increases. The extensive margin response to exchange rate changes is modest at the aggregate level because firms that enter, following a depreciation, are smaller relative to existing firms.

Keywords: distribution costs, Exchange rates, exports, heterogeneity, pricing to market, productivity

JEL Classification: F12, F41

Suggested Citation

Berman, Nicolas and Martin, Phillipe and Mayer, Thierry, How Do Different Exporters React to Exchange Rate Changes? Theory, Empirics and Aggregate Implications (October 2009). CEPR Discussion Paper No. DP7493, Available at SSRN: https://ssrn.com/abstract=1507490

Nicolas Berman

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Phillipe Martin

Institut d'Etudes Politiques de Paris (Sciences Po) ( email )

27, rue Saint-Guillaume
Paris, 75007
France

Thierry Mayer (Contact Author)

Université Paris I Panthéon-Sorbonne - TEAM ( email )

106-112 boulevard de l'hôpital
Cedex 13 Paris, P75647
France

HOME PAGE: http://team.univ-paris1.fr/teamperso/mayer/thierry.htm

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4407 8267 (Phone)
+33 1 4407 8267 (Fax)

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris ( email )

9 Rue Georges Pitard
Paris Cedex 15, F-75015
France

HOME PAGE: http://www.cepii.fr/anglaisgraph/pagepers/mayer.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2
Abstract Views
1,162
PlumX Metrics