How Do Trade Margins Respond to Exchange Rate? The Case of Egypt

This paper examines the effect of the exchange rate devaluation on the quantity and value of exports (intensive margin of trade), as well as the ability to export new products and/or venture into new export markets (extensive margin of trade). Using monthly firm-level and sector-level data for the period 2005–2016, the study is applied to Egypt, which appears to be an interesting case to investigate considering several changes that have occurred in its exchange rate regime. The exchange rate is measured by the real effective exchange rate and exchange rate misalignment. The results of the intensive margin show that a depreciation of the real exchange rate (RER) increases the value of exports without affecting the quantity of exports, highlighting the fact that the price effect is more significant than the quantity effect: depreciation lowers the foreign currency price of exports, but does not increase the quantity of exports. The response of the extensive margin shows that both the number of destinations and the number of products respond positively to the exchange rate depreciation. At the sectoral level, the intensive margin seems to matter for some products more than others. Indeed, the most beneficial products are those that are sensitive to RER depreciations and for which Egypt has a comparative advantage, such as fruits and vegetables, apparel and clothing, fibers, mineral fuels and oils, and some chemical products. At the destination level, European countries seem to be the most sensitive.