Working Paper: CEPR ID: DP2606
Authors: Jos Manuel Campa
Abstract: This paper looks at the responsiveness of a country's export supply to exchange rate changes and measures its quantitative importance by breaking down export adjustments between changes in output levels by existing exporters (intensive margin) and movements due to changes in the number of exporters (extensive margin). Using data on a representative sample of Spanish manufacturing firms, the paper finds sunk costs hysteresis in entry and exit to be an important factor in determining export market participation, but unrelated to exchange rate uncertainty. The sunk costs of entering the market appear to be much larger than the costs of exiting the market. Finally, although hysteresis exists, its effect on the responsiveness of aggregate trade volumes to exchange rate changes is quantitatively small. A 10% home currency depreciation results in an increase in export volume due to the increase in the number of exporting firms of only 1.5% of export volume.
Keywords: entry and exit in export markets; exchange rate volatility; export elasticity; hysteresis
JEL Codes: F31; F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sunk costs (G31) | hysteresis in export market participation (F14) |
| hysteresis in export market participation (F14) | persistence in firms' export participation decisions (F10) |
| exchange rate changes (F31) | export supply elasticity (F10) |
| 10% depreciation of the peseta (F31) | 15% increase in export volume due to new firms entering the market (F10) |
| existing exporters adjusting output levels (F14) | majority of response to exchange rate changes (F31) |