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The Cambridge-INET Institute - continuing as the Janeway Institute

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Rodnyansky, A.

(Un)Competitive Devaluations and Firm Dynamics

WP Number: 1902

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.

JEL Codes: E52 E65 F23 F31 F41 F42 G32

Author links: Alexander Rodnyansky  

PDF: wp1902.pdf

Open Access Link: 10.17863/CAM.36013

Theme: transmission