Firm Export Dynamics and the Exchange Rate: A Quantitative Exploration

This article provides a theoretical model of firm dynamics that replicates the export elasticity values estimated in the empirical literature, and the heterogeneous export response of firms against exchange rate fluctuations. I analyze alternative versions of the model, which allows for a decomposition of the contributions of the different mechanisms (distribution costs, imported intermediate inputs, gradual growth of foreign demand, market access costs in foreign/domestic currency). I evaluate the intensive and extensive margins of exports, and examine the behavior at the aggregate and firm levels. Distribution costs represent the most important factor, but are not sufficient, to replicate elasticity estimations. I show that this mechanism substantially exceeds the relevance of imported intermediate inputs. Distribution costs allow the model to replicate the heterogeneous response of foreign sales to exchange rate movements by decreasing the demand elasticity of more productive firms. I provide a quantitative test using firm-level panels constructed from model simulations and contrast the results with empirical specifications.