Exchange rate volatility and fluctuations in the extensive margin of trade

Abstract

The existing evidence for exporters׳ entry and exit in response to exchange rate movements is based on either low frequency data or a sample with large devaluations. Using quarterly data of U.S. bilateral trade with 99 countries, this study provides new evidence that the extensive margin of trade fluctuates over the business cycle. First, I show that the extensive margin of exports to the U.S. and the extensive margin of imports from the U.S. are more volatile than the output of almost all trading partners. Next, I find that fixing exchange rates with the U.S. dollar, having a free trade agreement with the U.S., and an increase in country size is significantly associated with the stability of the pattern of trade with the U.S.