Exchange Rate Movements and the Distribution of Productivity

Abstract: This paper examines how movements in the real exchange rate affect the distribution of labor productivity within industries. Appreciations of the local currency expose domestic plants to more competition as export opportunities shrink and import competition intensifies. As a result, smaller less productive plants are forced from the market, which truncates the lower end of the productivity distribution, and surviving plants face a reduction in physical sales (unless they adjust their mark-up), which, in the presence of scale economies, can lower productivity. Using quantile regression, we find that movements in the exchange rate do, indeed, have distributional effects on productivity.