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Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks

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  • Jen Baggs
  • Eugene Beaulieu
  • Loretta Fung
  • Beverly Lapham

Abstract

We use comprehensive firm-level data to estimate the responses of heterogeneous Canadian retail firmsto real exchange rate movements. Our analysis focuses on a period characterized by large fluctuations in the Canadian dollar, providing an opportunity to quantify both intensive and extensive marginresponses in retail industries to real exchange rate shocks and to examine how those responses differacross firms, locations, and sub-industries. Our results indicate that a real Canadian currency appreciation significantly reduces a retailer's sales, employment, and profits. The strength of this negative effect is decreasing in the distance of a retailer from the US-Canada border. We do not find evidence of a strong relationship between real exchange rate movements and the number of operating firms northe probability of firm survival. These findings are consistent with the view that a real Canadian dollarappreciation increases cross-border shopping by Canadians, resulting in a negative demand shock forCanadian retailers, and the dominant response by firms to such a shock is through the intensive margin.
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Suggested Citation

  • Jen Baggs & Eugene Beaulieu & Loretta Fung & Beverly Lapham, 2016. "Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks," Review of International Economics, Wiley Blackwell, vol. 24(3), pages 635-666, August.
  • Handle: RePEc:bla:reviec:v:24:y:2016:i:3:p:635-666
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    File URL: http://hdl.handle.net/10.1111/roie.12229
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    Cited by:

    1. Foellmi, Reto & Jäggi, Adrian & Schnell, Fabian, 2020. "Currency appreciation, distance to border and price changes: Evidence from Swiss retail prices," CEPR Discussion Papers 15019, C.E.P.R. Discussion Papers.
    2. Friberg, Richard & Steen, Frode & Ulsaker, Simen A., 2018. "Hump-shaped cross-price effects and the extensive margin in cross-border shopping," Discussion Paper Series in Economics 20/2019, Norwegian School of Economics, Department of Economics, revised 23 Sep 2019.
    3. Zhe Chen & Michael B. Devereux & Beverly Lapham, 2017. "The Canadian border and the US dollar: The impact of exchange rate changes on US retailers," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1525-1555, December.
    4. Thomas M. Fullerton & Adam G. Walke, 2019. "Cross-Border Shopping and Employment Patterns in the Southwestern United States," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 1-19, October.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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