attempt to link changes in REERs, FDI and exports before and after the identified devaluations. Section VI concludes.

# **II. Related Literatures**

This note is related to various literatures. The linchpin is the role of changes in exchange rates in determining both trade flows, especially exports, and FDI. As will become apparent, these literatures are deep, but as far as I know, there are not contributions that focus on both exports and FDI simultaneously.

# _A. The “Pass Through” Literature_

An important literature has focused on the price mechanism that would operate if exchange-rate changes are to have an impact on international trade flows. That is, such changes must have an effect on prices observed by consumers, which then affect consumption choices. However, the literature remains dominated by low pass through estimates. In their literature survey, Goldberg and Knetter (1997) concluded that that a typical estimated elasticity of local goods prices with respect to exchange rate changes is close to one-half in U.S. data, but the elasticity varies across industries. Such a low elasticity relative to the Law of One Price prediction of unity is possibly due to errors in variables, the increasing utilization of imported inputs (intermediate goods) in domestic production, and, more importantly, monopolistic competition and the existence of markups above marginal production costs by firms selling differentiated manufactured goods. Hence Goldberg and Knetter called for further research on the nature of markups, thus linking the macro and trade literatures to the literature on industrial organization on pricing to market behavior. More recent contributions have also found relatively low pass-through from exchange rate changes into local prices, with the low pass through persisting over time (see, for example, Gopinath and Rigobon 2008, and Campa and Goldberg 2005). For our purposes, it suffices to say that exchange-rate devaluations might not yield export surges when firms opt to increase markups through pricing to market.

Notwithstanding the evidence on imperfect pass-through, the existence of fixed costs of exporting can lead to persistent effects of exchange rate devaluations on exports as new exporting firms overcome entry costs in the aftermath of devaluation but the absence of fixed costs of exit imply that firms do not necessarily exit from exporting even after the exchange rate appreciates, thus causing hysteresis in exports. This was the argument of the seminal papers by Baldwin (1988) and Baldwin and Krugman (1989). Dixit (1989) modeled a firm’s decision to become an exporter as a financial option, due to the uncertainty over the value of the exchange rate over time. In his model, firms’ option value of exporting rises with exchange-rate uncertainty. In any case, the key point of this literature was that asymmetric costs of entry into and exit from exporting are likely to be associated with long-lasting effects of devaluations on exports. Evidence from case studies of developing economies reported by Roberts and Tybout (1997) suggested that episodes of export booms were associated with many firms entering export activities while incumbent exporters tended not to increase their exports in response to devaluations. Similarly, Freund and Pierola (2008) analyzed over ninety episodes of manufactured “export surges” and concluded that export surges in developing (but not in developed) economies were associated with large real exchangerate devaluations that left exchange rate undervalued and with the advent of new export products and 3