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A Re-examination of the Exchange Rate Disconnect Puzzle: Evidence from Japanese Firm Level Data

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Author Info

  • Robert Dekle
  • Hyeok Jeong
  • Heajin Ryoo

Abstract

The 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.

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File URL: http://www.usc.edu/dept/LAS/economics/IEPR/Working%20Papers/IEPR_06.46_%5BDekle,Jeong,Ryoo%5D.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Institute of Economic Policy Research (IEPR) in its series IEPR Working Papers with number 06.46.

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Length: 43 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:scp:wpaper:06-46

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Cited by:
  1. Arpita Chatterjee & Rafael Dix-Carneiro & Jade Vichyanond, 2012. "Multi-Product Firms and Exchange Rate Fluctuations," Discussion Papers 2012-29, School of Economics, The University of New South Wales.
  2. Miguel Fuentes & Pablo Ibarrarán, 2006. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico’s Manufacturing Sector," Documentos de Trabajo 312, Instituto de Economia. Pontificia Universidad Católica de Chile..
  3. 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.
  4. Cheung, Yin-Wong & Chinn, Menzie D. & Qian, XingWang, 2012. "Are Chinese trade flows different?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2127-2146.

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