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Published by: caitlynharvey on Aug 14, 2013
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George AlessandriaFederal Reserve Bank of PhiladelphiaSangeeta PratapHunter College & Graduate Center City University of New York Vivian YueBoard of Governors of the Federal Reserve SystemJuly 2013
Export Dynamics in Large Devaluations
July 2013
George Alessandria Sangeeta Pratap Vivian Yue
Federal Reserve Bankof PhiladelphiaHunter College & Graduate CenterCity University of New YorkBoard of Governors of the Federal Reserve System
We study the source and consequences of sluggish export dynamics in emerging marketsfollowing large devaluations. We document two main features of exports that are puzzlingfor standard trade models. First, given the change in relative prices, exports tend to growgradually following a devaluation. Second, high interest rates tend to suppress exports.To address these features of export dynamics, we embed a model of endogenous exportparticipation due to sunk and per period export costs into an otherwise standard small openeconomy. In response to shocks to productivity, the interest rate, and the discount factor,we …nd the model can capture the salient features of export dynamics documented. At theaggregate level, the features giving rise to sluggish exports lead to more gradual net exportreversals, sharper contractions and recoveries in output, and endogenous stagnation in laborproductivity.
JEL classi…cations:
E31, F12.
Export Dynamics, Devaluation, Net Exports.
Alessandria: Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA19106 (george.alessandria@phil.frb.org); Pratap: Department of Economics, Hunter College and theGraduate Center City University of New York Room 695 Park Ave, New York, NY 10065(sangeeta.pratap@hunter.cuny.edu); Yue: Federal Reserve Board of Governors, 20th and Constitution Ave,Washington DC 20551 (vivian.yue@frb.gov). We thank Luigi Bocola, Svetlana Chekmasova, and OscarPuente for excellent research assistance. We also thank Costas Arkolakis, Ariel Burstein, Lukasz Drozd,Brent Neiman, Francesco Pappada, John Romalis, Kim Ruhl, Mike Sposi, and the participants at the At-lanta Fed-NYU confererence, BU, ECB-Bank of Canada Workshop on Exchange Rates, New York Fed,NYU, Federal Reserve Board, Paris School of Economics, HEC-Montreal, INSEAD, IMF, ITAM, Ohio StateUniversity, Richmond Fed, Stonybrook, Tsinghua Macro Workshop, Econometric Society Annual meeting,LACEA-IDB-CAF Trade, Integration, Growth Conference, American Economic Annual Meeting, and theSociety of Economic Dynamics Annual Meeting. We are grateful to Lorenza Martinez and Kensuke Teshimafor the use of Mexican customs data. The views expressed herein are those of the authors and should not beinterpreted as re‡ecting the views of the Federal Reserve Bank of Philadelphia or the Board of Governors orany other person associated with the Federal Reserve System.
This paper is available free of charge at www.philadelphiafed.org/research-and-data/publications/working-papers/.
1. Introduction
A widely held view in international economics is that it takes time for a change inthe exchange rate to substantially change the pattern of international trade.
Following largedevaluations, this sluggishness is clearly evident for exports as the peak response occurs witha lag of three or four years. This sluggishness in exports is often attributed to the costs thatproducers face to adjust the markets or customers that they serve. The worsening …nancialconditions associated with devaluations may also weaken the export response by making itdi¢cult for producers to …nance export expansion.
This gradual export expansion is thoughtto a¤ect the dynamics of net exports and potentially output (Baldwin and Krugman, 1989).Here, we reconsider empirically and theoretically the source of sluggish export growth andits aggregate consequences. We document the salient micro and macroeconomic features of export dynamics in large devaluations. We then develop a small open economy model inwhich exports are determined in part by the entry decisions of non-exporters and the exitdecisions of exporters. We show that the model can capture the observed sluggish growthof exports following a devaluation and that these export dynamics lead net exports to shiftmore gradually from de…cit to surplus. We also …nd that these sluggish export dynamics leadto a deeper contraction and stronger recovery in output as well as a smaller depreciation.Additionally, the resources used to expand into new export markets leads measured laborproductivity to stagnate.We begin by characterizing the salient features of exports around large devaluations in11 emerging markets. We focus on these periods of economic turmoil as these are large, easilyidenti…ed events.
First, we con…rm that there is a gradual expansion of exports following adevaluation. The elasticity of exports to the real exchange rate is initially low and rises overtime, peaking in the third year following the devaluation.
Second, interest rates play a role
An example of this sluggishness is from the lierature on the J-curve (Magee, 1973, Junz and Rhomberg,1973, Meade, 1988 and Backus, Kehoe and Kydland 1994).
Manova (2013) studies the role of credit constraints on …rm level exporting decisions.
More generally, it is well known that trade tends to respond with a lag to real exchange ‡uctuations.That is, the estimates of the short-run trade elasticity are smaller than the long-run trade elasticity. Anadvantage of focusing on large devaluations is that they provide an estimate of the time it takes for trade torespond.
The export elasticity is measured as the change in the ratio of exports to foreign expenditures dividedby the change in the real exchange rate, where the changes are calculated relative to their pre-devaluation

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