Monetary shocks, exchange rates, and the extensive margin of exports
University of Exeter Business School
Monetary policy and trade globalization
This paper develops a two-country Dynamic General Equilibrium model to assess the relationship between the real exchange rate and the extensive margin of exports. Exchange rate pass-through to consumer prices governs the relative strength of a demand channel onto the exporting decision of a firm. With incomplete pass- through, a favorable movement in the real exchange rate generates increased export participation and an expansion in the extensive margin of exports. This result is consistent with firm-level studies, and contributes to an ongoing empirical debate as to the importance of changes in export participation over the business cycle.
Working paper. Earlier version published as Hong Kong Institute for Monetary Research, working papers (4-2010)