Do Sunk Costs of Exporting Matter for Net Export Dynamics?
FRB of Philadelphia Working Paper Series No. 05-20
50 Pages Posted: 13 Oct 2005
Date Written: September 2005
Not all firms export every period. Firms enter and exit foreign markets. Previous research has suggested that these export participation decisions have significant aggregate implications. In particular, it has been argued that these export decisions are important for the comovements of net exports and the real exchange rate. In this paper, the authors evaluate these predictions in a general equilibrium environment. Specifically, assuming that firms face an up-front, sunk cost of entering foreign markets and a smaller period-by-period continuation cost, they derive the discrete entry and exit decisions yielding exporter dynamics in an otherwise standard equilibrium open economy business cycle model. The authors show that the export decisions of firms in the model are infuenced by the business cycle in a manner consistent with evidence presented for U.S. exporters. However, in contrast to previous partial equilibrium analyses, model results reveal that the aggregate effects of these export decisions are negligible.
Keywords: Net exports, Real exchange rate, Exporters
JEL Classification: E31, F12
Suggested Citation: Suggested Citation