PERSISTENT EFFECTS OF TRANSITORY EXCHANGE RATE SHOCKS ON FIRM DYNAMICS

Jen Baggs, Eugene Beaulieu () and Loretta Fung

Contemporary Economic Policy, 2014, vol. 32, issue 2, 334-350

Abstract: type="main" xml:lang="en">

Recent evidence demonstrates that exchange rate movements can affect firm survival and entry. However, there is little evidence on whether there are asymmetric effects of an appreciation versus depreciation. This article uses firm-level data over a period of a large currency appreciation followed by a large depreciation to examine possible asymmetries in firm survival and entry resulting in the endurance of exchange rate effects. We find that when real currency appreciations precede depreciations, appreciations reduce firm entry rates to a greater degree than depreciations increase that rate; but appreciations reduce the probability of firm survival at a magnitude not significantly different from the increase in probability that results from a depreciation. Taken together, we find that a 10% reciprocal episode of exchange rate appreciation and depreciation will result in 1,647 (5.2%) fewer firms compared with a regime with no change in the exchange rate. These results are consistent with exchange rate hysteresis whereby a transitory exchange rate shock has a permanent effect. (JEL F1)

Date: 2014
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