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Volkswirtschaft - Open Access LMU - Teil 03/03 Podcast
Capital Adjustment Costs: Implications for Domestic and Export Sales Dynamics

Capital Adjustment Costs: Implications for Domestic and Export Sales Dynamics

Volkswirtschaft - Open Access LMU - Teil 03/03 vor 10 Jahren

0:00

Theoretical and empirical work on export dynamics has generally
assumed constant marginal production cost and therefore ignored
domestic product market conditions. However, recent studies have
documented a negative correlation between firms' do- mestic and
export sales growth, suggesting that firms can be capacity
constrained in the short run and face increasing marginal
production cost. This paper develops and estimates a dynamic model
of export behavior incorporating short-term capacity con- straints
and endogenous capital investment. Consistent with the empirical
evidence, the model features firms' sales substitutions across
markets in the short term, and generates time-varying transition
paths of firm responses through firms' capital adjust- ments over
time. The model is fit to a panel of plant-level data for Colombian
manufacturing indus- tries and used to simulate how firm responses
transition following an exchange-rate devaluation. The results
indicate that incorporating capital adjustment costs is quan-
titatively important, as shown by the length of the transition
period, and the difference between the short-run and long-run
exchange rate elasticity of exports. Firms' expeca- tion on the
permanence of the policy changes also matters.