Relative Real Exchange-Rate Volatility, Multi-Destination Firms and Trade: Micro Evidence and Aggregate Implications

In this paper, we study how firm-level export performance is affected by Real Exchange Rate (RER) volatility and investigate the way this effect is shaped by firm size and more specifically, the number of destinations. Our empirical analysis relies on a French firm-level database that combines balance-sheet and product-destination-specific export information over the period 1995-2009. More specifically, we show that export performance is affected by both bilateral and multilateral real exchange rate volatility (that is, the weighted volatility of all other destinations served by firms), the latter embodying the existence of third-market effects. Besides, we find that firm size and the number of destinations seem to exacerbate the impacts of both bilateral and multilateral RER volatilities on export performance: firms tend to reallocate exports away from destinations characterized by higher, relative RER volatility, and are even more prone to do so when the scope of possible reallocations is extended. Our results suggest that more destination-diversified firms are better able to handle exchange rate risks, with significant implications for exports at the macro level: a very simple empirical exercise shows that aggregate exports would have been 6.6% larger if all firms had been able to reallocate exports across sufficiently numerous destinations.