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Do sunk costs of exporting matter for net export dynamics?

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  • George Alessandria
  • Horag Choi

Abstract

Not all firms export every period. Firms enter and exit foreign markets. Previous research has suggested that these export participation decisions have significant aggregate implications. In particular, it has been argued that these export decisions are important for the comovements of net exports and the real exchange rate. In this paper, the authors evaluate these predictions in a general equilibrium environment. Specifically, assuming that firms face an up-front, sunk cost of entering foreign markets and a smaller period-by-period continuation cost, they derive the discrete entry and exit decisions yielding exporter dynamics in an otherwise standard equilibrium open economy business cycle model. The authors show that the export decisions of firms in the model are influenced by the business cycle in a manner consistent with evidence presented for U.S. exporters. However, in contrast to previous partial equilibrium analyses, model results reveal that the aggregate effects of these export decisions are negligible.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-20.

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Date of creation: 2005
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Handle: RePEc:fip:fedpwp:05-20

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Keywords: Exports ; Foreign exchange rates;

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  1. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
  2. Kwan, Simon H. & Eisenbeis, Robert A., 1995. "An analysis of inefficiencies in banking," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 733-734, June.
  3. Robert B. Avery & Allen N. Berger, 1988. "Risk-based capital and off-balance sheet activities," Finance and Economics Discussion Series 35, Board of Governors of the Federal Reserve System (U.S.).
  4. John H. Boyd & Stanley L. Graham, 1988. "The profitability and risk effects of allowing bank holding companies to merge with other financial firms: a simulation study," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-20.
  5. Marcia Millon Cornett & Evren Ors & Hassan Tehranian, 2002. "Bank Performance around the Introduction of a Section 20 Subsidiary," Journal of Finance, American Finance Association, vol. 57(1), pages 501-521, 02.
  6. Linda Allen & Julapa Jagtiani, 1996. "Risk and Market Segmentation in Financial Intermediaries’ Returns," Center for Financial Institutions Working Papers 96-36, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. João A. C. Santos, 1998. "Commercial banks in the securities business: A review," BIS Working Papers 56, Bank for International Settlements.
  8. Rebecca S. Demsetz & Philip E. Strahan, 1995. "Historical patterns and recent changes in the relationship between bank holding company size and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 13-26.
  9. Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, vol. 18(1), pages 91-110, March.
  10. Simon Kwan, 1998. "Securities activities by commercial banking firms' Section 20 subsidiaries: risk, return and diversification benefits," Working Papers in Applied Economic Theory 98-10, Federal Reserve Bank of San Francisco.
  11. Bhargava, Rahul & Fraser, Donald R., 1998. "On the wealth and risk effects of commercial bank expansion into securities underwriting: An analysis of Section 20 subsidiaries1," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 447-465, May.
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