Exchange rates do matter: French job reallocation and exchange rate turbulence, 1984-1992

This paper evaluates the impact of exchange rate fluctuations on inter- and intra-sectoral job reallocation. First, a vintage model of factor reallocation in a small open economy facing real exchange rate fluctuations is developed. Movements in the real exchange rates affect the profitability of production units, and the pattern of entry and exit. The model predicts a 'bunching' of entry and exit around the peak of predictable appreciation episodes, as less productive firms are cleansed and newcomers adopt more efficient technologies. The paper then investigates empirically the pattern of job creation and destruction in response to real exchange rate movements in France between 1984 and 1992, using disaggregated firm level data. Traded-sector industries are very responsive to real exchange rate movements,In the benchmark estimation, a 1% appreciation of the real exchange rate destroys 0.95% of tradable jobs over the next two years. Further, job creation is more volatile than job destruction. The results indicate the importance of large unanticipated changes in the real exchange rate. (C) 1999 Elsevier Science B.V. All rights reserved.