A Re-Examination of the Exchange Rate Disconnect Puzzle: Evidence from Japanese Firm Level Data

44 Pages Posted: 28 Apr 2006

See all articles by Robert Dekle

Robert Dekle

University of Southern California - Department of Economics

Hyeok Jeong

University of Southern California - Department of Economics

Heajin Ryoo

University of Southern California - Department of Economics

Date Written: September 2005

Abstract

The empirical literature examining aggregate data has generally found small or insignificant effects of exchange rate fluctuations on export volumes. This lack of association between real quantities, such as export volumes and the exchange rate is the so-called "exchange rate disconnect puzzle." Using firm level data, however, the relationship between export volumes and exchange rates turns to significantly negative. This paper attempts to reconcile these aggregate and firm level findings, using firm level data from Japan. We estimate a simple microeconomic model of exports to show that an appreciation of the exchange rate reduces export volumes at the firm level. After consistent aggregation, the relationship still remains significant at aggregate levels. However, we show that the omission of some key productivity variables, or ignoring the distributions of heterogeneous firm level characteristics biases the elasticity of exports to exchange rates toward zero.

Suggested Citation

Dekle, Robert and Jeong, Hyeok and Ryoo, Heajin, A Re-Examination of the Exchange Rate Disconnect Puzzle: Evidence from Japanese Firm Level Data (September 2005). IEPR Working Paper No. 06.46. Available at SSRN: https://ssrn.com/abstract=898887 or http://dx.doi.org/10.2139/ssrn.898887

Robert Dekle

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-8335 (Phone)

Hyeok Jeong (Contact Author)

University of Southern California - Department of Economics ( email )

Heajin Ryoo

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

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