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

Description

This paper examines 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 a key determinant of firms’ responses to exchange rate volatility. Firms with positive trade exposure experience a larger increase, or a smaller decline, in employment growth compared to similar non-exposed firms following an increase in real exchange rate volatility. The relationship between exchange rate volatility and employment is also found to be non-linear with respect to trade exposure. Furthermore, the impact of exchange rate movements varies across firm characteristics. Domestically owned firms respond differently to exchange rate shocks than foreign-owned firms, and exporters exhibit different responses compared to non-exporters when faced with heightened exchange rate volatility.

Publication Date

1-1-2016

Keywords

Real exchange rate volatility, Trade exposure

Conference

11th Annual Conference of Knowledge Forum, 2-5 June, 2016, IIT Chennai

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