PERSISTENT EFFECTS OF TRANSITORY EXCHANGE RATE SHOCKS ON FIRM DYNAMICS

Authors

  • JEN BAGGS,

    1. Baggs: Associate Professor, Faculty of Business, University of Victoria, PO Box 1700, STN CSC, Victoria, BC V8W 2Y2, Canada. Phone 250-472-4617, Fax 250-721-6067, E-mail jenbaggs@uvic.ca
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  • EUGENE BEAULIEU,

    1. Beaulieu: Professor, Department of Economics, University of Calgary, SS 454, 2500 University Drive NW, Calgary, AB T2N 1N4, Canada. Phone 403-220-5862, Fax 403-282-5262, E-mail beaulieu@ucalgary.ca
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  • LORETTA FUNG

    1. Fung: Associate Professor, Department of Economics, National Tsing Hua University, 803 TSMC Building, 101 Section 2 Kuang Fu Rd, Hsin Chu 30013, Taiwan. Phone +886-3-516-2165, Fax +886-3-562-9805, E-mail phfung@mx.nthu.edu.tw
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    • We are grateful to the Economic Analysis and Social Analysis Divisions at Statistics Canada, especially John Baldwin and Danny Leung, for accessing the data used in this article as well as their guidance and hospitality, and Amélie Lafance for expedited output vetting. We would also like to thank Robert Feenstra, Sébastien LaRochelle-Côté, Constance Smith, Stuart Landon, Azim Essaji, co-editor Brad Humphreys, two anonymous referees, and seminar participants at Wilfrid Laurier University and the 2006 Canadian Economics Association Annual Conference for helpful comments. Financial support from SSRHC standard research grant is gratefully acknowledged. Any errors and omissions are solely our responsibility.


  • DISCLAIMER: “The contents of this paper have been subject to vetting and pass the Disclosure Rules & Regulations set forth by Statistics Canada.”

Abstract

Recent evidence demonstrates that exchange rate movements can affect firm survival and entry. However, there is little evidence on whether there are asymmetric effects of an appreciation versus depreciation. This article uses firm-level data over a period of a large currency appreciation followed by a large depreciation to examine possible asymmetries in firm survival and entry resulting in the endurance of exchange rate effects. We find that when real currency appreciations precede depreciations, appreciations reduce firm entry rates to a greater degree than depreciations increase that rate; but appreciations reduce the probability of firm survival at a magnitude not significantly different from the increase in probability that results from a depreciation. Taken together, we find that a 10% reciprocal episode of exchange rate appreciation and depreciation will result in 1,647 (5.2%) fewer firms compared with a regime with no change in the exchange rate. These results are consistent with exchange rate hysteresis whereby a transitory exchange rate shock has a permanent effect. (JEL F1)

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