In this paper, we use firm-level data to quantify the intensive and extensive margin effects of real exchange rate fluctuations on Canadian retailers. We expect an exchange rate movement to have demand-side effects on retailers through its impact on cross-border shopping by Canadian and American consumers and to have supply-side effects through its impact on the price of imported goods that Canadian retailers purchase for resale. Our primary focus is on the demand-side effects and we find significant responses in Canadian retail to real exchange rate movements along the intensive margin.
Previous studies such as Di Matteo and Di Matteo (1996), Ferris (2000), and Timothy and Butler (1995) use data on the number of same day automobile trips across the Canada-U.S. border as a measure of cross border shopping and document a positive relationship between the number of such trips by Canadians and the relative price of Canadian goods to U.S. goods (the real exchange rate). Figure 1 illustrates this relationship for 1980-2009 for Canadian travelers and shows an opposite and much less pronounced relationship for American travelers.
In addition, Chandra et. al. (2010) examine both same day and overnight trips and find that overnight trips also respond to exchange rate movements in a similar way. Campbell and Lapham (2004) use U.S. county-level data for a subset of retail industries and find significant effects of real exchange rate movements on average employment and the number of retailers for Food Stores, Gasoline Stations, and Eating Places. Using data on Swedish alcohol sales, Asplund et.al. (2007), find significant effects on retailers’ sales with those effects diminishing with distance of the retailer from the border.
As cross-border shopping has been an important phenomenon for both Canada and border states, there have been several studies summarizing cross-border shopping patterns between the U.S. and Canada. For example, Ford(1992) reports that a 1991 survey from Ontario, Canada reveals that Canadian consumers living in regions within 30 minutes by driving of the border are the most frequent cross-border shoppers (on a weekly basis) and typically purchase groceries, gasoline, and clothing. Consumers living in regions within 60 minutes by driving are the second most frequent cross-border shoppers and they tend to buy slightly more durable or expensive items when shopping in the United States. Finally, consumers living in regions that are within 90 minutes by driving are also engaged in cross border shopping but in fewer trips and they usually purchase more expensive goods.
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Exchange Rate Movements and Firm Dynamics in Canadian Retail
