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Does Productivity Respond to Exchange Rate Appreciations? A Theoretical and Empirical Investigation

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Author Info

  • Yao Tang

    ()
    (Department of Economics, Bowdoin College)

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Abstract

Although real currency appreciations pose direct difficulties for exporters and import-competing firms as they will face more intense competition, is it possible that such competition spurs firms to improve productivity? To answer this question, the paper first constructs a theoretical model to show how the competitive pressures of currency appreciations induce firms to improve productivity by adopting new technologies. In addition, the model predicts that during appreciations there will be a positive relation between market concentration and improvements in productivity for industries highly exposed to trade, because the marginal benefits of productivity improvement will be bigger for firms with a larger market share. The paper then examines Canadian manufacturing data from 1997 to 2006, and finds evidence consistent with model predictions. I find that growth rates of labor productivity were on average higher during the Canadian dollar appreciation between 2002 and 2006, after controlling for industry characteristics. Within the group of highly traded Canadian industries, the more concentrated ones experienced larger growth in labor productivity.

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File URL: http://digitalcommons.bowdoin.edu/econpapers/2/
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Bibliographic Info

Paper provided by Bowdoin College, Department of Economics in its series Working Papers with number 1.

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Length: 48 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:bwd:wpaper:2

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Postal: Brunswick, ME 04011
Phone: 725-3340
Web page: http://www.bowdoin.edu/economics/
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Keywords: exchange rate appreciation; productivity; technology adoption;

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Cited by:
  1. Beine, Michel & Bos, Charles S. & Coulombe, Serge, 2012. "Does the Canadian economy suffer from Dutch disease?," Resource and Energy Economics, Elsevier, vol. 34(4), pages 468-492.

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