Template-Type: ReDIF-Paper 1.0
Title: Capital Adjustment Cost: Implications for Domestic and Export Sales Dynamics
Author-Name: Yanping Liu
Author-Email: yanping.liu@uni-mannheim.de
Classification-JEL: F12, L11, F14
Keywords:International trade, heterogeneous firms; capacity constraints; capital adjustment costs; firm dynamics; firm panel data.

Abstract: Theoretical and empirical work on export dynamics has generally assumed constant
marginal production cost, which implies separability of production decisions for export
and domestic product markets. However, recent studies have documented a negative
contemporaneous correlation between …rms’ domestic and export sales growth, suggesting that …rms could be capacity constrained in the short run and face increasing
marginal production cost. This paper develops and structurally estimates a dynamic
model of …rm export behavior incorporating short-term capacity constraints and endogenous capital investment. Consistent with the empirical evidence, the model features substitution of sales across markets in the short term, and generates di¤erent
short- and long-term export responses.
The model is …t to a panel of plant-level data for Colombian manufacturing industries and used to simulate …rm transitions in response to permanent and temporary
exchange-rate devaluations. The results indicate that incorporating capital adjustment
costs has quantitatively important implications for …rm-level responses. First, it takes
more than …ve years for …rms to fully adjust to a permanent change of the exchangerate process. Second, the long-run exchange rate elasticity of exports is substantially
higher than that in the short run. Firms’ expectation on the permanence of the policy
change also matters. The failure to accurately anticipate the duration of the devaluation results in reduction in …rm-level pro…ts due to over- or under- investment in
capital

Note: 
Length: 44
Creation-Date: 2019-07
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp106
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2019_106