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Effects of Exchange Rate Volatility on Export Diversity: The Role of Production Constraints

Author

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  • Ngo Van Long
  • Yifan Li
  • Zhuang Miao

Abstract

We develop a model of product-variety adjustment in which a firm's choice of the number of varieties exported to each market (export scope) reflects a trade-off between short-run responses to demand shocks associated with exchange rate fluctuations and the costs of making investment in the production capacity. Firms reduce their export scopes when markets suffer negative demand shocks but, in the case of positive shocks, are unable to expand them adequately, due to insufficient pre-investment in production capacity. As a result, we observe asymmetric export responses to exchange rate fluctuations, and negative effect of exchange rate volatility on exports. Data on Chinese exporters support our predictions. Nous développons un modèle d'ajustement de la variété des produits dans lequel le choix d'une entreprise du nombre de variétés exportées vers chaque marché reflète un compromis entre les réponses à court terme aux chocs de la demande associés aux fluctuations des taux de change et les coûts d’investissement dans la capacité de production. Les entreprises exportent moins de produits lorsque les marchés subissent des chocs de demande négatifs mais, dans le cas de chocs positifs, ne sont pas en mesure d’augmenter le nombre de produits, car la capacité de production a été déterminée. En conséquence, nous observons des réponses asymétriques des exportations aux fluctuations des taux de change et un effet négatif de la volatilité des taux de change sur les exportations. Les données sur les exportateurs chinois confirment nos prévisions.

Suggested Citation

  • Ngo Van Long & Yifan Li & Zhuang Miao, 2020. "Effects of Exchange Rate Volatility on Export Diversity: The Role of Production Constraints," CIRANO Working Papers 2020s-41, CIRANO.
    • Handle: RePEc:cir:cirwor:2020s-41
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    Keywords

    Multiproduct Firms; Exchange Rate Volatility; Entreprises multiproduits; Volatilité du taux de change;
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