Working Paper: CEPR ID: DP13253
Authors: L. Alan Winters; Ana Fernandes
Abstract: This paper exploits the abrupt and sharp depreciation of the British Pound after the Brexit referendum as a quasi-natural experiment to investigate the effect of exchange rate shocks on export quantity, price, entry and exit. We use transaction-level export data for the universe of exporters in Portugal. Using monthly observations on export quantity and price for the same firm exporting the same product to buyers in the UK and in other countries, allows us to cleanly identify the differential response to the shock for the UK market, relative to other markets. We find that exporters reduced their mark-up in the UK market after the referendum shock. Our estimates imply a large pricing-to-market coefficient and exchange rate pass-through. Exporters that are more productive adjust their mark-ups by more after the exchange rate shock, and have lower pass-through. There is more pricing-to-market for consumer goods than for intermediate inputs. Within the same firm-product, export quantity to the UK also decreased after the shock. The referendum shock reduced the rate of export entry to the UK market by Portuguese firms and the probability of their continuing to export in the UK.
Keywords: Brexit Vote; Exchange Rate Pass-Through; Exchange Rate Shocks; Exports; Extensive Margin of Trade; Intensive Margin of Trade; Pricing-to-Market
JEL Codes: F14; F31; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Brexit vote (F69) | exporters reduced their markup in the UK market relative to other markets (F14) |
| Brexit vote (F69) | significant decrease in export prices charged to the UK (F14) |
| Brexit vote (F69) | 10% depreciation of the pound (F31) |
| 10% depreciation of the pound (F31) | substantial exchange rate pass-through (ERPT) (F31) |
| Brexit vote (F69) | export quantity to the UK fell by 4 percentage points (F10) |
| Brexit vote (F69) | probability of Portuguese firms entering or continuing to export to the UK decreased (F10) |
| more productive exporters (F10) | adjusted their markups more significantly (D43) |
| Brexit vote (F69) | significant pricing-to-market behavior (D40) |