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 increases 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 effects of exchange rate movements vary across firm characteristics. Domestically owned firms respond differently to exchange rate shocks than foreign-owned firms, and exporters display 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

20th International Conference on Macroeconomic Analysis and International Finance, 25-29 May, 2016, Greece

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