A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Fabling, Richard; Sanderson, Lynda Working Paper Exchange rate fluctuations and the margins of exports New Zealand Treasury Working Paper, No. 15/08 Provided in Cooperation with: The Treasury, New Zealand Government Suggested Citation: Fabling, Richard; Sanderson, Lynda (2015) : Exchange rate fluctuations and the margins of exports, New Zealand Treasury Working Paper, No. 15/08, ISBN 978-0-478-43676-1, New Zealand Government, The Treasury, Wellington This Version is available at: http://hdl.handle.net/10419/205686 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ www.econstor.eu Exchange rate fluctuations and the margins of exports Richard Fabling and Lynda Sanderson New Zealand Treasury Working Paper 15/08 June 2015 NZ TREASURY Exchange rate fluctuations and the margins of exports 15/08 MONTH/YEAR June 2015 AUTHORS Richard Fabling Motu Economic and Public Policy Research PO Box 24390 Wellington 6142 NEW ZEALAND Email: [email protected] Telephone: +64 4 939 4250 Lynda Sanderson The Treasury PO Box 3724 Wellington 6140 NEW ZEALAND Email: [email protected] Telephone: +64 4 917 6230 ISBN(ONLINE) ISBN 978-0-478-43676-1 URL Treasury website at June 2015: http://www.treasury.govt.nz/publications/research-policy/wp/2015/15-08 Persistent URL: http://purl.oclc.org/nzt/p-1763 ACKNOWLEDGEMENTS The authors wish to thank Statistics New Zealand for access to the data, and Christopher Ball, Richard Kneller, Oscar Parkyn and Mark Roberts for valuable comments and suggestions. Richard Fabling also thanks the Treasury for funding this research. NZ TREASURY New Zealand Treasury PO Box 3724 Wellington 6008 NEW ZEALAND Email: [email protected] Telephone: +64 4 472 2733 Website: www.treasury.govt.nz DISCLAIMER The results in this paper are not official statistics, they have been created for research purposes from the Integrated Data Infrastructure (IDI) managed by Statistics New Zealand. The opinions, findings, recommendations and conclusions expressed in this paper are those of the author(s) not Statistics NZ, the Treasury, or Motu Economic and Public Policy Research. Access to the anonymised data used in this study was provided by Statistics NZ in accordance with security and confidentiality provisions of the Statistics Act 1975. Only people authorised by the Statistics Act 1975 are allowed to see data about a particular person, household, business or organisation and the results in this paper have been confidentialised to protect these groups from identification. Careful consideration has been given to the privacy, security and confidentiality issues associated with using administrative and survey data in the IDI. Further detail can be found in the Privacy impact assessment for the Integrated Data Infrastructure available from www.stats.govt.nz. The results are based in part on tax data supplied by Inland Revenue to Statistics NZ under the Tax Administration Act 1994. This tax data must be used only for statistical purposes, and no individual information may be published or disclosed in any other form, or provided to Inland Revenue for administrative or regulatory purposes. Any person who has had access to the unit-record data has certified that they have been shown, have read, and have understood section 81 of the Tax Administration Act 1994, which relates to secrecy. Any discussion of data limitations or weaknesses is in the context of using the IDI for statistical purposes, and is not related to the data’s ability to support Inland Revenue’s core operational requirements. Statistics NZ confidentiality protocols were applied to the data sourced from the New Zealand Customs Service. Any discussion of data limitations is not related to the data’s ability to support these government agencies’ core operational requirements. Abstract This paper examines the relationship between exchange rate fluctuations and New Zealand export performance. To isolate the impact of the exchange rate, as opposed to contempo- raneous (and related) fluctuations in New Zealand’s economic performance or overseas market characteristics, we focus on bilateral export relationships at the firm level and control for both time-invariant country characteristics and changes in aggregate economic conditions. We examine two key margins of export adjustment – the probability of exporting (the extensive margin) and the average value of exports per firm (the intensive margin) – and distinguish between impacts on market incumbents and new or potential entrants. Finally, we specifically take account of the potential for interaction between the level and volatility of the exchange rate to affect exporting, as implied by theories of exchange rate hysteresis. JEL Classification: D22; F14; F31 Keywords: Margins of exports; Hysteresis; Exchange rates WP15/08 Exchange rate fluctuations and the margins of exports i Executive Summary We examine the relationship between exchange rate fluctuations and New Zealand export performance. To isolate the impact of the exchange rate, as opposed to contemporaneous (and related) fluctuations in New Zealand’s economic performance or overseas market characteristics, we focus on bilateral export relationships at the firm level and control for both time-invariant country characteristics and changes in aggregate economic conditions. We examine two key margins of export adjustment – the probability of exporting (the extensive margin) and the average value of exports per firm×country relationship (the intensive margin) – and distinguish between impacts on market incumbents and new or potential entrants. We contribute to the international literature by addressing the potential for interaction between the level and the volatility of the exchange rate, as implied by theories of exchange rate hysteresis. By increasing the uncertainty firms face regarding future export returns, more volatile exchange rates are expected to reduce exporters’ sensitivity to the current exchange rate level. Our empirical results provide support for this hypothesis. We find significant impacts of bilateral exchange rate levels on both the propensity to export and the value of exports per relationship. On average, a ten percent increase in the bilateral exchange rate (corresponding to around one standard deviation over the sample period) reduces average exports to that destination by around three percent among committed exporters, and reduces the probability of a new firm entering the destination by around 0.04 percentage points. While the probability of exit is found to be unresponsive to exchange rate changes in general, this appears to be driven by a small group of high-value, committed export relationships. When we exclude those firm×country relationships which are observed in every year (and hence are unresponsive to observed exchange rate changes by definition) we find that a ten percent increase in the bilateral exchange rate reduces the probability of remaining in that market by 0.07 percentage points among the remaining exporters. Exchange rate volatility is also shown to have a negative effect on the intensive margin, but does not appear to affect market entry or exit. Although high and volatile exchange rates appear to negatively affect bilateral export performance in general, the empirical estimates suggest that this relationship is reversed for Australia. This is consistent with the Australian market providing something of a “safe haven” for New Zealand exporters in the face of global macroeconomic shocks. Finally, we find systematic differences in the exchange rate sensitivity of different groups of firms. Greater product differentiation (a proxy for the ability to exercise market power) appears to reduce exchange rate sensitivity, both in terms of export propensity and the value of export receipts among continuing exporters. Meanwhile, firms that export to a larger number of markets appear to be less sensitive to the level of the bilateral exchange rate with their existing markets, but more sensitive with respect to entry into new markets. WP15/08 Exchange rate fluctuations and the margins of exports ii Contents Abstract i Executive Summary ii 1 Motivation1 2 Conceptual Framework3 3 Data and methodology6 4 Results 9 4.1 Aggregate analysis................................9 4.2 Firm-level regression analysis.......................... 13 5 Conclusions 17 Tables 20 Appendix A: Definitions