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The extensive margin of trade and monetary policy

Yuko Imura () and Malik Shukayev ()

Journal of Economic Dynamics and Control, 2019, vol. 100, issue C, 417-441

Abstract: This paper studies the effects of monetary policy shocks on firms’ participation in exporting. The VAR analysis shows that the extensive margin of exports declines in response to domestic expansionary monetary shocks. We develop a two-country dynamic stochastic general equilibrium model in which heterogeneous firms make forward-looking decisions on whether to participate in the export market and prices are staggered across firms and time. We show that while lower interest rates and a currency depreciation associated with an expansionary monetary policy help to increase the value of exporting, the inflationary effects of the policy stimulus weaken the competitiveness of some firms, resulting in a contraction in firms’ export participation. In contrast, positive productivity shocks lead to a currency depreciation and an expansion in export participation at the same time. We show that, overall, the extensive margin is more sensitive to firms’ price competitiveness with other firms in the export market than to exchange rate movements or interest rates.

Keywords: Exporter dynamics; Monetary policy; Firm heterogeneity; Exchange rate (search for similar items in EconPapers)
JEL-codes: F44 E52 F12 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: The Extensive Margin of Trade and Monetary Policy (2018) Downloads
Working Paper: The Extensive Margin of Trade and Monetary Policy (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:100:y:2019:i:c:p:417-441

DOI: 10.1016/j.jedc.2019.01.002

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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