China & World Economy / 51–75, Vol. 28, No. 4, 2020

Exchange Rate Volatility, Heterogeneous Firms and Market Concentration

Bing Lu, Yaqi Wang, Xiaofen Tan

Abstract

With the gradual promotion of market-oriented reform of the RMB exchange rate, the fluctuation range of the RMB exchange rate is increasing. How to deal with the impact of exchange rate volatility on Chinese exports is an important challenge faced by China. This paper finds that although exchange rate volatility, as a whole, has a negative impact on exports, high-productivity exporters are less prone to exchange rate volatility shock in both intensive and extensive margins. As high-productivity firms are less affected by exchange rate risk, they account for larger market shares. This paper, from a new perspective, provides evidence that increasing productivity helps mitigate the negative impact of exchange volatility on exports.