Real exchange rate volatility and employment: Role of external sector exposure

Description

This paper studies the impact of real exchange rate volatility on firm-level employment using a difference-in-differences model applied to a panel of 900 manufacturing firms. Trade exposure, measured as the difference between the shares of exports and imports in a firm’s total revenues and input costs, respectively, emerges as an important determinant of firms’ responses to higher exchange rate volatility. Firms with positive trade exposure are found to experience a larger increase—or a smaller decrease—in employment growth compared to similar non-exposed firms in response to increased real exchange rate volatility. The impact of exchange rate volatility on employment is also found to be non-linear with respect to trade exposure. Finally, domestically owned firms respond differently to exchange rate shocks compared to foreign-owned firms. Similarly, exporters exhibit different responses to higher exchange rate volatility than non-exporters.

Publication Date

1-1-2016

Keywords

Real exchange rate volatility, Trade exposure

Conference

Macroeconomics and Finance Conference, 18-20 June, 2016, IGIDR, Mumbai, India

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