9811059 Gourinchas This project addresses the following question: what happens to the real economy when exchange rates fluctuate? More specifically, this research analyzes the impact of exchange rate fluctuations on factor reallocation. While traditional models emphasize inter-sectoral reallocation of workers and capital, this project focuses on intrasectoral effects. New multi-sectors non-representative models of sectoral reallocation are developed building upon the rich theoretical and empirical literature on micro-economic non-convexities and heterogeneity. The emphasis is on the timing of technology adoption, an important source of heterogeneity across firms, which is likely to be influenced by relative price fluctuations such as real exchange rates. A long run goal of this research is to incorporate information on the dynamics of the cross-section to help identify how shocks propagate through the economy. Another goal is to understand and tie together micro and macro-economic implications of real exchange rate volatility and persistent swings on pricing decisions, factor allocation or entry and exit. This research will use micro data from the Longitudinal Research Database (LRD)to measure and identify the exchange rate component driving plants' physical capital adjustments. The proposed specification identifies exchange rate contributions off the different exchange rate elasticities of different sectors. This part of the research measures how exchange rate fluctuations affect the timing and magnitude of micro adjustment and how they are filtered through the cross-section distribution and time variations in plants adjustment rate. This research provides useful information on the propagation and amplification of reallocation shocks, the micro adjustment patterns, well as information on which industries are exchange rate sensitive. Lastly, it relates the results to observable characteristics (product durability, mark-up, market structure, capital intensity and trade exposure).
