In this chapter, we investigate the impact of exchange rate volatility on the firm’s exports. Using plant-level panel data from the Colombian Manufacturing Census, we estimate a dynamic export equation using panel data techniques (the system-GMM estimator) developed by Arellano and Bover (1995) and Blundell and Bond (1998). Our estimates imply a small negative impact of exchange rate volatility, constructed either using a GARCH model or a simple standard deviation measure, on the plant’s decision to export (the extensive margin) and on the volume of exports as a share of total sales (the intensive margin). We further find that the negative impact of volatility is especially pronounced for plants in the second quartile of the size distribution, which are small and moderate size plants that are most likely to enter foreign markets or increase sales abroad when given a small export incentive. Finally, we show that employing plant-level data vs. industry-level data in the empirical analysis is preferable as it produces more precise and reliable estimates of the volatility effect. We conclude with a discussion of future directions in this line of research.
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