Large real exchange rate movements may affect the real eocnomy in a manner comparable to significant episodes of tariff changes. This paper conducts a firm level analysis of the impact of exchange rate movements on firm survival, sales and industry entry rates. Our empirical analysis exploits a detailed set of Canadian firm level data from 1986 to 1997 during which the Canadian dollar experienced an approximately 30% appreciation in the first six years and 30% depreciation in the later six years. These reciprocal movements in the Canadian dollar offer an excellent opportunity to investigate the consequences of lare exchange rate movements for domestic firms. We find that survival, sales and entry are negatively associated with appreciations in the Canadian dollar. The impact on survival is less pronounced for more productive firms. We find that over our sample period, the magnitude of the impact of exchange rate changes on firm survival, sales, and entry were considerably larger than the effect of CUSTA mandated tariff changes.
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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number
2007-04.