destinations.<sup>4</sup> Campa (2004) found that export growth associated with hysteresis driven by the extensive margin of trade was small in a sample of Spanish manufacturing firms, which is consistent with Freund and Pierola’s finding that persistent devaluations are not associated with export surges in developed economies. New research examining French firms in light of exchange-rate changes suggests that responses can vary across firms, with high-productivity firms or firms that sell high-quality goods tending to raise markups during depreciations while low productivity firms tend to raise their export volumes (Berman, Martin and Meyer 2009). Hence it seems that overall it is difficult to expect huge impacts of exchange rate devaluations on exports, at least for certain types of countries, because the pass through can be attenuated by strategic pricing behavior while the extensive margin effect tends to be small.

# _B. Currency Under-valuation, Exports and Growth_

As mentioned, Freund and Pierola (2008) found that exchange rate devaluations that resulted in significant under-valuation of developing-country currencies were associated with export surges in developing countries, based on an examination of 92 episodes of export surges (instead of episodes of REER adjustments). To some extent, these results might be driven by the research design: the authors first identified the episodes of manufactured exports surges and then explored correlates of the magnitude of the export growth rate, but they did not ask whether the probability of observing an export surge is partially correlated with real exchange rate fluctuations. In contrast, Hausmann, Pritchett and Rodrik (2005) did find that the probability of observing a sustained and large GDP growth episode was associated with real devaluations. Nonetheless, the fact that episodes of sustained devaluations were systematically correlated with both the size of the export surge and the number of new exported products in Freund and Pierola (2008) is an interesting result. As will become apparent, the ongoing shares some methodological aspects with the event-study approach, but our focus is on episodes of large real exchange-rate devaluations and the performance of FDI and total merchandise exports before and after devaluations.<sup>5</sup> In any case, it is worth mentioning other contributions that examine the link the between exchange rates and economic growth. Levy-Yeyati and Sturzenegger (1997) found that an indicator of exchange-rate undervaluation is associated with higher subsequent GDP per capita growth rates, but surprisingly do not argue that this finding works through exports, but rather that it works via capital accumulation. This finding is thus more tightly related to the literature on exchange rates and FDI reviewed below. Rodrik (2008) is perhaps the most complete assessment of the role of under-valued exchange rates in promoting economic growth. The author argued that exports can be hampered by market (coordination) failures, currency under-valuation can provide an impetus to exports and overcome said obstacles, and hence they are associated with faster growth. However, the statistical work presented by Rodrik is far from conclusive regarding the expected link between exchange rate under-valuation and exports as the primary

> 4 Freund and Pierola (2008, p. 3) define an export surge as “a significant and sustained increase in manufacturing export growth from one 7-year period to the next 7-year period.”

> 5 Freund and Pierola (2008) cite Freund (2005) and Hausmann, Pritchett and Rodrik (2005) as pre-existing studies that use the episodes approach. However, event studies have a long tradition in economics – see the literature review by MacKinlay (1997), which cites studies from the 1930s. The latter emphasizes the use of events as a determinant of economic and financial variables. That is, for example, events of news concerning firms can affect firm-specific stock market valuations. In a sense, this approach was meant to identify treatment effects and test whether outcomes before and after were significantly affected by the event or treatment. Our extremely preliminary empirical exercises follow the spirit of this earlier literature.

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