(Un)Competitive Devaluations and Firm Dynamics

64 Pages Posted: 10 Jan 2018 Last revised: 4 Oct 2018

See all articles by Alexander Rodnyansky

Alexander Rodnyansky

University of Cambridge - Faculty of Economics

Date Written: January 2, 2018

Abstract

This paper studies monetary and exchange rate policy in a world of global value chains. Using recent microdata from Japan and Russia, devaluations are shown to negatively affect exporters in terms of employment, domestic revenue and profitability relative to nonexporting firms. Given their substantial dependence on imported intermediate inputs, exporting firms are more exposed to marginal cost shocks following exchange rate movements. Standard macro models are too simplistic in their microstructure to capture these transmission channels. I propose a New Keynesian general equilibrium model with firm heterogeneity, varying intermediate import intensities, and international dollar pricing to explain the findings. Strategic complementarities improve the quantitative performance of the model without changing its qualitative properties. The new paradigm is successful in matching key firm-level moments as well as the evolution of inflation and net exports.

Keywords: Devaluations, Exchange Rates, Currency Wars, Monetary Policy Transmission, Real Effects, Multinational Firms, Expenditure Switching, Variable Markups, Wage Rigidity, Pass-Through

JEL Classification: E52, E65, F23, F31, F41, F42, G32

Suggested Citation

Rodnyansky, Alexander, (Un)Competitive Devaluations and Firm Dynamics (January 2, 2018). Available at SSRN: https://ssrn.com/abstract=3095698 or http://dx.doi.org/10.2139/ssrn.3095698

Alexander Rodnyansky (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://www.arodnyansky.com

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