Social and Behavioral Sciences Commons^™

Does Productivity Respond To Exchange Rate Appreciations? A Theoretical And Empirical Investigation, Yao Tang

Economics Department Working Paper Series

Although real currency appreciations pose direct difficulties for exporters and import-competing firms as they will face more intense competition, is it possible that such competition spurs firms to improve productivity? To answer this question, the paper first constructs a theoretical model to show how the competitive pressures of currency appreciations induce firms to improve productivity by adopting new technologies. In addition, the model predicts that during appreciations there will be a positive relation between market concentration and improvements in productivity for industries highly exposed to trade, because the marginal benefits of productivity improvement will be bigger for firms with a …