Trade flows and exchange rates: Importers, exporters and products

Abstract

Using highly-disaggregated transaction-level trade data, we document the importance of new firm-level trade partner relationships and the addition of new products to existing relationships in driving aggregate trade flows. Moreover, we find that these margins are sensitive to movements in the exchange rate and that larger firms are substantially more responsive in terms of both the number of trade partners and products. These findings are then rationalized in a model of international trade with endogenous matching between heterogeneous importers and exporters. Simulations of the model highlight: (1) a new channel through which exchange rates influence short-run trade flows; and (2) the importance of firm heterogeneity—on both sides of trade transactions—in the adjustment process.