A Re-examination of the Exchange Rate Disconnect Puzzle: Evidence from Japanese Firm Level Data
AbstractThe empirical literature examining aggregate data has generally found small or insignificant effects of exchange rate fluctuations on export volumes. This lack of association between real quantities, such as export volumes and the exchange rate is the so-called “exchange rate disconnect puzzle.” Using firm level data, however, the relationship between export volumes and exchange rates turns to significantly negative. This paper attempts to reconcile these aggregate and firm level findings, using firm level data from Japan. We estimate a simple microeconomic model of exports to show that an appreciation of the exchange rate reduces export volumes at the firm level. After consistent aggregation, the relationship still remains significant at aggregate levels. However, we show that the omission of some key productivity variables, or ignoring the distributions of heterogeneous firm level characteristics biases the elasticity of exports to exchange rates toward zero.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute of Economic Policy Research (IEPR) in its series IEPR Working Papers with number 06.46.
Length: 43 pages
Date of creation: Mar 2006
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-06 (All new papers)
- NEP-CBA-2006-05-06 (Central Banking)
- NEP-IFN-2006-05-06 (International Finance)
- NEP-INT-2006-05-06 (International Trade)
- NEP-SEA-2006-05-06 (South East Asia)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Cheung, Yin-Wong & Chinn, Menzie D. & Qian, Xing Wang, 2012.
"Are Chinese Trade Flows Different?,"
BOFIT Discussion Papers
14/2012, Bank of Finland, Institute for Economies in Transition.
- Longjiang Chen, 2011. "The effect of China's RMB exchange rate movement on its agricultural export: A case study of export to Japan," China Agricultural Economic Review, Emerald Group Publishing, vol. 3(1), pages 26-41, January.
- Fuentes, Miguel & Ibarrarán, Pablo, 2009.
"Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico’s Manufacturing Sector,"
IZA Discussion Papers
4494, Institute for the Study of Labor (IZA).
- Miguel Fuentes & Pablo IbarrarÃ¡n, 2006. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from MexicoÂ’s Manufacturing Sector," Documentos de Trabajo 312, Instituto de Economia. Pontificia Universidad Católica de Chile..
- Miguel Fuentes & Pablo Ibarrarán, 2010. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico´s Manufacturing Sector," Working Papers Central Bank of Chile 583, Central Bank of Chile.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Farideh Motamedi).
If references are entirely missing, you can add them using this form.