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N° 2009-32 |
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| December 2009 |
How do Different Exporters React to Exchange Rate
Changes?
Theory, Empirics and Aggregate Implications |
Nicolas Berman
Philippe Martin
Thierry Mayer |
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| 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. |
Non-technical summary  |
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Résumé
non-technique
en français |
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| Full text |
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| Gravity; heterogeneity; exchange rate; trade |
Keywords |
| F12 |
JEL classification |
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