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Exchange Rate Fluctuations, Plant Turnover and Productivity

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  • Ben Tomlin

Abstract

In a small open economy fluctuations in the real exchange rate can affect plant turnover, and thus aggregate productivity, by altering the makeup of plants that populate the market. An appreciation of the local currency increases the level of competition in the domestic market as import competition intensifies and export opportunities shrink, forcing less productive plants from the market and compelling new entrants to be more competitive than they otherwise would have been. Depreciations have the opposite effect, as import competition weakens and new export opportunities arise, less competitive plants are able to continue to operate in the market and crowd out new, more productive entrants. This paper develops a dynamic structural model that captures the effect of plantlevel productivity and real exchange rate fluctuations on plant entry and exit decisions in the Canadian agricultural implements industry, and how this, in turn, affects aggregate productivity. The model's dynamic parameters are estimated in two stages. Variable profit parameters and the per-period fixed cost of operation are estimated first using the Nested Pseudo Likelihood (NPL) algorithm, and then the parameters characterizing the distribution of unobserved potential entrant productivity, along with the cost of entry, are estimated in a second stage using the Method of Simulated Moments (MSM). Finally, simulations of the model are used to investigate the effects of shocks to the exchange rate process on aggregate industry productivity.

Suggested Citation

  • Ben Tomlin, 2010. "Exchange Rate Fluctuations, Plant Turnover and Productivity," Staff Working Papers 10-18, Bank of Canada.
  • Handle: RePEc:bca:bocawp:10-18
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    Cited by:

    1. Salamat Ali, 2017. "Exchange Rate Effects on Agricultural Exports: Firm-level Evidence from Pakistan," Discussion Papers 2017-09, University of Nottingham, GEP.
    2. Ferguson, Shon & Sanctuary, Mark, 2014. "Firm Productivity and Carbon Leakage: A Study of Swedish Manufacturing Firms," Working Paper Series 1035, Research Institute of Industrial Economics.
    3. Vivek Farias & Bar Ifrach & Gabriel Weintraub, 2012. "A Framework for Dynamic Oligopoly in Concentrated Industries," 2012 Meeting Papers 505, Society for Economic Dynamics.
    4. Kancs, d’Artis & Siliverstovs, Boriss, 2016. "R&D and non-linear productivity growth," Research Policy, Elsevier, vol. 45(3), pages 634-646.
    5. repec:eee:reveco:v:54:y:2018:i:c:p:27-43 is not listed on IDEAS
    6. Aguirregabiria, Victor, 2009. "Estimation of Dynamic Discrete Games Using the Nested Pseudo Likelihood Algorithm: Code and Application," MPRA Paper 17329, University Library of Munich, Germany.
    7. Ben Tomlin & Loretta Fung, 2015. "Exchange Rate Movements and the Distribution of Productivity," Review of International Economics, Wiley Blackwell, vol. 23(4), pages 782-809, September.
    8. Toraganlı, Nazlı & Yazgan, M. Ege, 2016. "Exchange rates and firm survival: An examination with Turkish firm-level data," Economic Systems, Elsevier, vol. 40(3), pages 433-443.
    9. Nazli Karamollaoglu & M. Ege Yazgan, 2014. "Firm Exit and Exchange Rates: An Examination with Turkish Firm-Level Data," Koç University-TUSIAD Economic Research Forum Working Papers 1411, Koc University-TUSIAD Economic Research Forum.

    More about this item

    Keywords

    Productivity; Exchange rates; Market structure and pricing;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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