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Markups and misallocation with evidence from exchange rate shocks

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  • Weinberger, Ariel

Abstract

In a setting with firms that charge variable markups, this paper finds that firm heterogeneity has welfare implications that result exclusively from the differential markup adjustment to global shocks. Changes in allocative efficiency are summarized by a sufficient statistic that can be directly measured with aggregate data. I use Chilean data between 1995 and 2007 to show that exchange rate shocks can be an important driver of allocative efficiency, as there are large changes in misallocation over time due to the way firms pass-through these shocks into markups. At the firm-level, there is evidence that importing firms pass-through real exchange rate appreciations into their markups. Over time, due to the compositional effect that ensues, industries that import a larger share of their inputs become more misallocated. In a structural model with productivity gains from importing, where firm market power increases with size, I show how firm reallocation in response to a positive supply shock rationalizes the reduced-form results.

Suggested Citation

  • Weinberger, Ariel, 2020. "Markups and misallocation with evidence from exchange rate shocks," Journal of Development Economics, Elsevier, vol. 146(C).
  • Handle: RePEc:eee:deveco:v:146:y:2020:i:c:s0304387820300699
    DOI: 10.1016/j.jdeveco.2020.102494
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    Cited by:

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    3. Ariel Weinberger & Qian Xuefeng & Mahmut Yaşar, 2021. "Export tax rebates and resource misallocation: Evidence from a large developing country," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1562-1608, November.
    4. Sun, Churen & Wu, Han, 2023. "The impact of export VAT rebate on firm-product markups: Evidence from Chinese industrial enterprises," Economic Modelling, Elsevier, vol. 119(C).
    5. Wen Yue & Xuefei Li, 2023. "Financial constraints and firms’ markup: evidence from China," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-13, December.
    6. Beguin, Malo, 2021. "Harmonization, Mutual Recognition or National Treatment: a Melitz approach," LIDAM Discussion Papers LFIN 2021010, Université catholique de Louvain, Louvain Finance (LFIN).

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    More about this item

    Keywords

    Variable mark-ups; Non-homothetic preferences; Exchange rate volatility; Misallocation; International trade;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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