Why do exports react less to real exchange rate depreciations than to appreciations? Evidence from Pakistan

Martin Brun, Juan Pedro Gambetta and Gonzalo Varela

Journal of Asian Economics, 2022, vol. 81, issue C

Abstract: We examine if and why export responses to real exchange depreciations are lower than those to appreciations. We document this asymmetric response using macro-level data for Pakistan and show that export adjustments after depreciations are less than one-third as fast as those to appreciations. We use product-destination level data to examine three complementary drivers of this asymmetry: (i) information frictions that increase the search costs of finding new clients; (ii) supply constraints related limited access to credit that reduce exporters’ capacity to scale up after relative prices become more favorable; and (iii) reduced prices in US dollars offered by international buyers after local currency depreciations, akin to a pricing-to-market mechanism. We find evidence of the three drivers explaining the dampened export response to depreciations. Policymakers in developing countries should consider addressing these issues to maximize export responses to real depreciations.

Keywords: Export performance; Real exchange rates; Financial dependence; Pricing-to-market; Developing countries; Threshold Autoregressive Models (search for similar items in EconPapers)
JEL-codes: D22 F14 F15 L25 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:81:y:2022:i:c:s1049007822000537

DOI: 10.1016/j.asieco.2022.101496

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