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Exchange Rate Movements and Firm Dynamics in Canadian Retail Industries
| Attachment | Size |
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| Retail_May03.pdf | 306.75 KB |
This paper examines the effects of exchange rate movements on Canadian
retail firms. As consumers living close to the Canada-US border are able to
choose to shop on either side of the border, changes in the price of
domestic goods and services relative to the foreign ones, including the
changes caused by exchange rate movements, can affect the demand faced by a
firm and thereby influence firm survival, size and profitability. Using
comprehensive data on Canadian retail firms from 1986 to 1997, a period
characterized by large appreciation and then depreciation of the Canadian
dollar, we are able to examine not only the exchange rate effects on retail
firms overall but also the effects on firms in different industry groups. We
particularly focus on three industry groups: food services and
accommodation, grocery stores and gasoline stations, and apparel and general
retail. Our findings show a mixed effect of exchange rate on firm survival.
However, for both of the size measures, sales and employment, and for
profitability, our results indicate an adverse industry-wide effect of real
currency appreciation, and the effect in general diminishes as firms are
located farther away from the border. The rate at which the size of exchange
rate effects diminishes differs across industries and variables.
Consumers living near the U.S.-Canada border can shift their expenditures between the two countries, so real exchange rate fluctuations can act as demand shocks to border areas' retail trade industries. Using annual county-level data, we estimate the effects of real exchange rates on the number of establishments and their average payroll in border counties for four retail ccna industries. In three of the four industries we consider, the number of operating establishments responds either contemporaneously or with a lag of one year to real exchange rate movements. For these industries, the response of retailers' average size is less pronounced. The rapid response of net entry is inconsistent with any model of persistent deviations from purchasing power parity that depends on retailers' costs of changing nominal prices.