LIU Qiren;HUANG Jianzhong
Department of International Economics and Trade, College of Economics, Jinan University;School of Business, Shanghai University of International Business and Economics
This paper investigates how domestic currency appreciation affects markup dispersion, a potential index of misallocation of resources. We find that firm’s markup elasticity to exchange rate are increasing with its export market share, so firms with higher market share reduce more of their markup in face of appreciation and thereafter reduce markup dispersion. We find robust evidence for our theoretical predictions using Chinese firm-level data. Our empirical identifications treat 2005 Chinese exchange rate reform as a qusi-natural experiment and find that RMB appreciation can significantly reduce markup dispersion within narrow defined industry. Appreciation forces higher markup firms to reduce more of their markup, therefore markup dispersion within that industry is directly reduced. In addition, it forces low productivity firms in high monopoly industry to abandon X-inefficiencies, which indirectly reduce misallocation.
RMB exchange rate;pricing to market;misallocation of resources;markup dispersion;exchange rate pass-through
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