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

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  • Brun, Martin
  • Gambetta, Juan Pedro
  • Varela, Gonzalo J.

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.

Suggested Citation

  • Brun, Martin & Gambetta, Juan Pedro & Varela, Gonzalo J., 2022. "Why do exports react less to real exchange rate depreciations than to appreciations? Evidence from Pakistan," Journal of Asian Economics, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:asieco:v:81:y:2022:i:c:s1049007822000537
    DOI: 10.1016/j.asieco.2022.101496
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    Cited by:

    1. Ghulam Mustafa & Saqib Hussain, 2023. "What are the Factors Making Pakistan’s Exports Stagnant? Insight from Literature Review," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 62(3), pages 449-460.
    2. Andrés Jung & Silvia Vázquez, 2023. "Export concentration in developing countries: do real exchange rate misalignments matter?," International Economics and Economic Policy, Springer, vol. 20(4), pages 563-593, October.

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    More about this item

    Keywords

    Export performance; Real exchange rates; Financial dependence; Pricing-to-market; Developing countries; Threshold Autoregressive Models;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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