Currency Shocks to Export Sales of Importers : A Heterogeneous Firms Model and Czech Micro Estimates

To what extent can exporters cushion the impact of currency appreciation shocks by using imported intermediates? We apply a partial equilibrium model with heterogeneous firms. Producers can serve the domestic market, export final goods, or import inputs. In the model, an exogenous exchange rate shock simultaneously affects the variable costs and revenues associated with exports and imports. The impact of a hypothetical 1% appreciation of the domestic currency on sales is estimated using a panel of 7,356 Czech manufacturing firms observed from 2003 to 2006. We focus on the above period to exploit the rich within-firm variation in trade strategies. The variation is probably associated with the lifting of trade barriers due to Czech EU membership since 2004. For firms that both export and import, the model predicts a drop in total sales of 0.2%, a drop in export sales of 0.8%, and a rise in domestic sales of 0.2%. JEL Codes: C23, C26, D22, D24, F12.