Export Dynamics and Business Cycles in Emerging Economies

We first study export dynamics in a number of large devaluation episodes in emerging markets. Using plant level data, we document that exports expand gradually following a large devaluation primarily because the number of exporters expands gradually. We further show the strong negative correlation between interest rates and exports, which is a new fact in strong contrast to the positive link between real exchange rate and exports. We examine the role of interest rate movements and sunk cost of exporting in a small open economy RBC model. We show that a model of exporter dynamics with sunk and fixed costs of exporting can generate most of the gradual rise in export participation from aggregate productivity shocks and global interest rate shocks. Countercyclical interest rates lower the present value of exporting following the devaluation discouraging exporting and partially offsetting the effect on trade from the change in relative prices. The model’s business cycle exporter dynamics are consistent with that of emerging economies. Moreover, model results reveal that export decision can have important aggregate effects.