Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract We use comprehensive firm-level data to estimate the responses of heterogeneous Canadian retail firms to real exchange rate movements. Our analysis focuses on a period characterized by large fluctuations in the Canadian dollar, providing an opportunity to quantify both intensive and extensive margin responses in retail industries to real exchange rate shocks and to examine how those responses differ across firms, locations, and sub-industries. Our results indicate that a real Canadian currency appreciation significantly reduces a retailer's sales, employment, and profits. The strength of this negative effect is decreasing in the distance of a retailer from the US-Canada border. We do not find evidence of a strong relationship between real exchange rate movements and the number of operating firms nor the probability of firm survival. These findings are consistent with the view that a real Canadian dollar appreciation increases cross-border shopping by Canadians, resulting in a negative demand shock for Canadian retailers, and the dominant response by firms to such a shock is through the intensive margin. Terms of use: Documents in

Hump-Shaped Cross-Price Effects and the Extensive Margin in Cross-Border Shopping

“…Asplund et al (2007), for instance, examine Swedish sales of alcoholic beverages and find that the cross-price elasticity for spirits is statistically indistinguishable from zero only some 700 kilometers from the border. Similarly, using Canadian data on several retail sectors, Baggs et al (2016) find effects that stretch far inland even though the most marked effect is up to 50 kilometers from the border. Building from a search-theoretic model with heterogeneous consumers Baggs et al (2018) estimate that an appreciation of the Canadian dollar substantially decreases sales of Canadian retailers and that this effect decreases with distance from the closest US stores (see also Chen et al (2017)).…”

“…Imposing a linear distance measure A likely important reason why the humpshaped pattern that we report has not been established before is that the previous literature uses parametric specifications where distance is linearly interacted with relative price (as in e.g. Baggs et al (2016). Sometimes higher order terms of distance are also included as in Asplund et al (2007)).…”

The Canadian border and the US dollar: The impact of exchange rate changes on US retailers

“…On the Canadian side, Baggs et al. () find significant effects of real exchange rate changes on Canadian retailers’ revenue, employment and profits, with effects that diminish with distance of retailers from the border. They do not find evidence of significant effects on the number of firms in the industry nor on the probability of firm survival.…”

“…(), Baggs et al. () and Campbell and Lapham () examine the effect of exchange rate changes on US and Canadian retail trade industries, generated by endogenous movements in cross‐border shopping.…”

“…Chandra et al (2014) estimate a structural model of cross-border travel for the US and Canada, examining in particular the elasticity of travel responses to exchange rate changes. Baggs et al (2017), Baggs et al (2016) and Campbell and Lapham (2004) examine the effect of exchange rate changes on US and Canadian retail trade industries, generated by endogenous movements in cross-border shopping.…”