Real Exchange Rate Fluctuations and the Dynamics of Retail Trade Industries on the U.S.-Canada Border

Consumers living near the U.S.-Canada border can shift their expenditures between the two countries, so real exchange rate fluctuations can act as demand shocks to border areas' retail trade industries. Using annual county-level data, we estimate the effects of real exchange rates on the number of establishments and their average payroll in border counties for four retail industries. In three of the four industries we consider, the number of operating establishments responds either contemporaneously or with a lag of one year to real exchange rate movements. For these industries, the response of retailers' average size is less pronounced. The rapid response of net entry is inconsistent with any model of persistent deviations from purchasing power parity that depends on retailers' costs of changing nominal prices.

Real exchange rates and retail trade on the U.S.-Canada border

Foreign exchange rates ; Retail trade

Industry Restructuring, Mark-ups, and Exchange Rate Pass-Through

Consumer prices are not very responsive to movements in nominal exchange rates and their response has fallen in Canada since the mid 1980s. This paper explores two of the most likely explanations for this decline in exchange rate pass-through to consumer prices: (1) lower inflation and (2) restructuring in the retail sector. We believe that both explanations are important but our primary focus in this paper is on the second explanation. We discuss the restructuring that has occurred in Canadian retail and trends in mark-ups and concentration in that sector. We argue that to understand these trends, it is important to examine pass-through in industrial organization models with strategic elements. Finally, we present a series of such models and evaluate the effects of various forms of restructuring on mark-ups, concentration, and exchange rate pass-through.Pass-Through, Restructuring, Strategic Pricing, Mark-ups, Exchange Rates, Imperfect Competition

Real exchange rate fluctuations and the dynamics of retail trade industries on the U.S.-Canada border

Consumers living near the U.S.-Canada border can shift their expenditures between the two countries, so real exchange rate fluctuations can act as demand shocks to border areas' retailers. Using annual county-level data, we estimate the effects of real exchange rates on the number of establishments and their average employment in border counties for four retail industries. In three of the four industries we consider, the number of operating establishments responds either contemporaneously or with a lag of one year, so long-run changes in net entry in fact occur quickly enough to matter for short-run fluctuations.Foreign exchange rates ; Retail trade

Productivity and the Decision to Import and Export: Theory and Evidence

This paper develops an open economy model with heterogeneous final goods producers who simultaneously choose whether to export their goods and whether to use imported intermediates. The model highlights mechanisms whereby import policies affect aggregate productivity, resource allocation, and industry export activity along both the extensive and intensive margins. Using the theoretical model, we develop and estimate a structural empirical model that incorporates heterogeneity in productivity and shipping costs using Chilean plant-level data for a set of manufacturing industries. The estimated model is consistent with the key features of the data regarding productivity, exporting, and importing. We perform a variety of counterfactual experiments to assess quantitatively the positive and normative effects of barriers to trade in import and export markets. These experiments suggest that there are substantial aggregate productivity and welfare gains due to trade. Furthermore, because of import and export complementarities, policies which inhibit the importation of foreign intermediates can have a large adverse effect on the exportation of final goods.exporting, importing, firm heterogeneity, aggregate productivity, resource allocation

Productivity and the decision to import and export: theory and evidence

This paper develops an open economy model with heterogeneous final goods producers who simultaneously choose whether to export their goods and whether to use imported intermediates. The model highlights mechanisms whereby import policies affect aggregate productivity, resource allocation, and industry export activity along both the extensive and intensive margins. Using the theoretical model, we develop and estimate a structural empirical model that incorporates heterogeneity in productivity and shipping costs using Chilean plant-level data for a set of manufacturing industries. The estimated model is consistent with the key features of the data regarding productivity, exporting, and importing. We perform a variety of counterfactual experiments to assess quantitatively the positive and normative effects of barriers to trade in import and export markets. These experiments suggest that there are substantial aggregate productivity and welfare gains due to trade. Furthermore, because of import and export complementarities, policies which inhibit the importation of foreign intermediates can have a large adverse effect on the exportation of final goods

Exchange rates, cross-border travel, and retailers: Theory and empirics

This paper provides a theoretical and empirical analysis of the effects of nominal exchange rate movements on cross-border travel by consumers and on retail firms' sales. We develop a search-theoretic model of price-setting heterogeneous retailers and traveling consumers who face nominal exchange rate shocks. These exchange rate shocks act as both a supply side shock for retailers though imported input prices and a demand side shock though their effect on the propensity for consumers to cross the border and shop at foreign retail stores. The model provides predictions regarding relationships between firm and regional characteristics and the magnitude of the effects of nominal exchange rate fluctuations and resulting cross-border travel activity on retailers' sales. We use our theoretical framework to motivate an empirical methodology applied to Canadian firm and consumer level data from 1987 to 2007. Our findings indicate that an appreciation of the Canadian dollar substantially increases cross border travel which in turn has a significant negative effect on the sales of Canadian retailers. These effects diminish with the distance of the retailer from the border and with the shopping opportunities available at relevant US destinations. Using counterfactual experiments, we quantify the effects of more restrictive border controls after September 2001 which discouraged cross-border trips and reduced retailer losses from cross-border shopping as well as the effects of increased duty free allowances which raised cross-border trips and reduced retailer sales

New-New Trade Policy

When national competitiveness is invoked as a policy objective, trade experts have learned to retort that countries don`t trade, firms do. This focus on the importance of the firm in international trade is consistent with the most recent developments in trade theory, but policy needs to catch up. Recognizing the growing anomalies in observed trade patterns relative to traditional models of trade based on national comparative advantage, the "new trade theory" of the 1980s looked at industries not countries, leading Nobel prize-winner Paul Krugman, a pioneer in this literature, to suggest the need for a new trade policy. Recent work on what some call the "new-new trade theory" focuses on the trading behaviour of individual firms, making a tight link between trade and productivity. In this paper we demonstrate how focusing on firms should be the foundation for a new-new trade policy, one that creates exciting opportunities for trade and investment promotion strategies, along with the need for much more targeted consultation strategies. We also discuss the implications of the new-new theory for regulatory coordination, and on new ways to cooperate with interlocutors in developing countries on the evolution of 21st century trade policy.New-new Trade Theory, Trade Policy