Exchange rate, industrial linkage, and firm employment

Abstract

AbstractThis study examines how exchange rate shocks impact firm‐level employment through five transmission channels, namely, the traditional import competition, export revenue, import cost channels, and the innovative upstream and downstream propagation channels. The upstream (downstream) propagation is defined as an indirect channel of the exchange rate shocks that transmits from downstream (upstream) firms via production chains. Augmenting the model of Campa and Goldberg (2001) by incorporating input–output linkage, I develop a theoretical framework to identify the mechanisms of exchange rate effects on firm‐level employment. Using Chinese firm‐level data and the industrial input–output table, this study yields empirical results that confirm the theory robustly. Specifically, the appreciation of exchange rates has large and significantly negative and positive impacts on firms’ employment through the upstream and downstream propagation channels, respectively.