Real exchange rate swings and export behavior: Explaining the robustness of Chilean exports

This dissertation proposes an explanation for the observed robustness of Chilean exports to a significant and sustained real appreciation of the domestic currency. An extension to Avinash Dixit's (1989) model of investment under uncertainty is developed to analyze the exporting participation decisions of Chilean firms. I suggest a characterization for the real exchange rate (RER) process that conforms more closely with empirical evidence than representations in the earlier literature. The model indicates that firms which incurred in sunk entry costs, would continue to export when the RER falls below the level at which they entered the foreign market. The numerical solution of the model shows that--relative to the entry RER--a prototypical firm would continue to export for up to an 85% real appreciation of the domestic currency. In a variety of simulations presented, I find that the robustness of exporters in this sense is invariably confirmed.; The analysis--both analytically and numerically--reveals that although RER volatility can enhance dramatically firms' exporting robustness, only sunk costs are necessary for this result. This provides the basis for the main hypothesis tested in the dissertation. I derive an empirical model of firms' exporting decisions directly from the theoretical model proposed. The model is then estimated on previously unavailable Chilean exporting firm data as a random-effects dynamic panel probit.; The estimation results show that firms which either were corporations, paid higher real wages or belonged to the food processing industry were all more likely to export. Also, unobserved firm heterogeneity is identified as an important contributor to exporting. Crucially, I find that sunk costs have been significant determinants of the exporting decisions of Chilean firms. This finding is consistent with the theoretical model and supports the proposed explanation for the observed robustness of Chilean exporters. I also find evidence suggesting that, relative to the base value, sunk costs may have declined for a typical firm over the sample years. This may open an investigation question for further future research.