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Exchange rates as shock absorbers: The role of export margins

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  • Cavallari, Lilia
  • D׳Addona, Stefano

Abstract

This study addresses the role of floating exchange rates as shock absorbers when trade involves previously traded goods (intensive margin) as well as new goods and previously non-traded goods (extensive margin). In a panel VAR model of 23 developed economies, we first document that adjustment to real shocks occurs mainly at the extensive margin and particularly so in fixed regimes. This in turn amplifies output fluctuations. We then propose a model with firm entry and endogenous selection of exporters that generates dynamics in line with the estimated responses.

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  • Cavallari, Lilia & D׳Addona, Stefano, 2015. "Exchange rates as shock absorbers: The role of export margins," Research in Economics, Elsevier, vol. 69(4), pages 582-602.
    • Handle: RePEc:eee:reecon:v:69:y:2015:i:4:p:582-602
    DOI: 10.1016/j.rie.2015.10.001
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    Cited by:

    1. Lewis, Vivien & Winkler, Roland, 2015. "Fiscal policy and business formation in open economies," Research in Economics, Elsevier, vol. 69(4), pages 603-620.
    2. Stefano D’Addona & Lilia Cavallari, 2020. "External Shocks, Trade Margins, and Macroeconomic Dynamics," Economies, MDPI, vol. 8(1), pages 1-26, January.
    3. Cavallari, Lilia & D'Addona, Stefano, 2017. "Output stabilization in fixed and floating regimes: Does trade of new products matter?," Economic Modelling, Elsevier, vol. 64(C), pages 365-383.
    4. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2015. "The domestic and international effects of euro area market reforms," Research in Economics, Elsevier, vol. 69(4), pages 555-581.

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