By George Alessandria, Sangeeta Pratap and Vivian Yue
This paper studies export dynamics in emerging markets following large devaluations. We document two main features of exports that are puzzling for standard trade models. First, given the change in relative prices, exports tend to grow gradually following a devaluation. Second, high interest rates tend to suppress exports. To address these features of export dynamics, we embed a model of endogenous export participation due to sunk and per period export costs into an otherwise standard small open economy. In response to shocks to productivity, interest rates, and the discount factor, we find the model can capture the salient features of export dynamics documented. At the aggregate level, the features giving rise to sluggish export dynamics leading to more gradual net export dynamics, sharper contractions in output, and endogenous declines in labor productivity
While this paper focusses on the sluggishness of exports, it has also interesting implications regarding the trade balance. Indeed the model rationalizes a violation of the Marshall-Lerner condition for emerging markets, a condition that is typically assumed for developed economies but apparently does not hold universally. It all boils down to the fact that devaluations are accompanied by other price changes that matter to the first degree, hence the necessity to look at devaluations in a general equilibrium.