Exchange rates, aggregate productivity and the currency of invoicing of international trade

Available from: 
October 2013
Paper author(s): 
Javier Cravino (University of Michigan)
Globalization - Trade

I use novel customs data from Chile and a model of international prices with nominal rigidities to study how nominal exchange rate movements impact aggregate output and productivity. A special feature of this dataset is that it records the currency in which transactions are invoiced. I exploit this feature to estimate how exchange rate movements generate substitution across goods priced in different currencies. I show that export prices are rigid in the currency in which they are invoiced, so in a given destination, the relative price of products invoiced in different currencies fluctuates with the nominal exchange rate. The response in the relative quantities of these products can then be used to identify the elasticity. I find this elasticity to be low, indicating that the expenditure switching effects of exchange rates are limited. I then investigate how changes in export prices generated by exchange rate movements affect aggregate productivity by affecting the allocation of production across exporters. Guided by a quantitative open economy model disciplined by some features of my data, I show that these effects can be significant. In particular, a 10% change in the exchange rate that increases markup dispersion reduces aggregate productivity in the tradable sector by 0.5%. Alternative parameterizations that do not account for the observed heterogeneity in invoicing predict changes in productivity at least five times smaller.


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Research section: 
Lacea 2013 annual meeting
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