Total factor productivity, exports and prices

Abstract

A heterogeneous firm trade model is developed to describe pricing behavior and output allocation between domestic and export sales in the face of exchange rate fluctuations. An export constraint is introduced, based on financial requirements o firms. Constrained firms would export less and expand more domestic aoutput, so domestic prices would tend to fall. This explains the negative correlation between the export share and the relative output price. The export response of firms is econometrically estimated, in terms of entry/exit probabilities in the export markets and the export share, for a panel of Uruguayan firms between 1997 and 2005, as functions of structural firm characteristics and environment variables, particularly the exchange rate. The impact of trade liberalization on total productivity of Uruguayan manufacturing firms is estimated, both with respect to final product as to intermediate input tariffs. The methodology controls for unonserved prices and demand shocks effects.