| Author/Presenter |
Ben Tomlin (Boston University) |
| Title |
Exchange Rate Volatility, Plant Turnover and Productivity |
| Abstract |
In a small open economy fluctuations in the real exchange rate can affect firm turnover, and thus aggregate productivity, by altering the makeup of plants that populate the market. An appreciation of the local currency increases the level of competition in the domestic market as import competition intensifies and export opportunities shrink, forcing less productive plants from the market and compelling new entrants to be more competitive than they otherwise would have been. Depreciations have the opposite effect, as import competition weakens and new export opportunities arise, less competitive plants are able to continue to operate in the market and crowd out new, more productive plants. This paper develops a dynamic structural model that captures the effect of plant-level productivity and real exchange rate fluctuations on plant entry and exit decisions in the Canadian agricultural implements industry. I employ an estimation algorithm that addresses the so-called curse of dimensionality -- caused by a state space that grows exponentially in the number of competing plants -- by assuming that plant managers are boundedly rational about the strategies of their competitors. The estimation process increases the sophistication of plant beliefs until errors become negligible. Finally, simulations of the model are used to test relevant policy counterfactuals that give insight on the relationship between movements in the real exchange rate and average productivity. Results indicate that entry subsidies can have a positive effect on aggregate productivity when there is a currency depreciation. |
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