Working Paper: CEPR ID: DP7493
Authors: Nicolas Berman; Philippe Martin; Thierry Mayer
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 Codes: F12; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High productivity firms (D21) | Increase their export prices (F14) |
| Low productivity firms (D22) | Increase their export volumes (F10) |
| Exchange rate changes (F31) | High productivity firms absorb exchange rate movements in their markups (D21) |
| Selection effect due to fixed export costs (F12) | High productivity firms can export (F10) |
| High distribution costs (D39) | More pronounced pricing to market behavior (D40) |