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How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications

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  • Jérôme Héricourt
  • Clément Nedoncelle

Abstract

How can the lack of reaction of aggregate exports to Real Exchange Rate (RER) volatility be explained? Using a French firm-level database that combines balance-sheet and product-destination-specific export information over the period 1995-2009, we propose a micro-founded explanation to this macro puzzle, by investigating how firms reallocate exports across destinations following RER volatility shocks. We show that firm-level bilateral exports to a considered destination also react to external volatility, represented by several indicators we build. Firms tend to reallocate exports away from destinations with unfavorable dynamics in terms of RER volatility, and this effect grows with the scope of possible reallocations. Efficient diversification of destinations served appear therefore as another way to handle exchange rate risks, and provides an explanation to the small aggregate trade response to RER volatility: if big multi-destination firms, who account for the bulk of aggregate exports, can react to an adverse shock of RER volatility somewhere by transferring trade to other and less volatile destinations, this leaves exports mainly unchanged at the macro level.

Suggested Citation

  • Jérôme Héricourt & Clément Nedoncelle, 2016. "How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications," Working Papers 2016-05, CEPII research center.
  • Handle: RePEc:cii:cepidt:2016-05
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    References listed on IDEAS

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    Cited by:

    1. Fontagné, Lionel & Orefice, Gianluca, 2018. "Let’s try next door: Technical Barriers to Trade and multi-destination firms," European Economic Review, Elsevier, vol. 101(C), pages 643-663.
    2. de Sousa, José & Disdier, Anne-Célia & Gaigné, Carl, 2015. "Export decision under risk," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205584, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    Real Exchange Rate Volatility; Multi-destination Exporters; Reallocation; Aggregation;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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