Does exchange rate undervaluation matter for exports and trade margins ? evidence from firm-level data

Abstract EN

Exploiting a new dataset available for four countries (Egypt, Jordan, Kuwait and Yemen), this paper assesses the claim that real exchange rate undervaluation affects both the quantity of exports (intensive margin) and the probability of exporting a certain product to a certain destination (extensive margin) of trade in Arab countries.

We find robust evidence suggesting that RER depreciation/undervaluation promotes exports at both the intensive and the extensive margins.

Moreover, when financial openness is driven by FDI the latter reinforces the RER effects, but it tends to counter it when it is mainly dominated by non-FDI flows.

In this case there will be even a more dire need for a higher economy-wide subsidy through an undervalued real currency in order for manufacturing exporting firms to grow at the intensive margin, and especially for overcoming the more challenging impediments of opening new markets or developing new export products.