Exchange Rate Appreciations and the Distribution of Productivity: Is Importing Inputs Sustainable for Emerging Countries?

A static model is used to investigate how the exchange rate movement affect the distribution of productivity within an industry. Quantile regression is then used to empirically test the effects of RMB exchange rate appreciation on the distribution of labor productivity within industries. Based on China’s manufacturing micro-enterprise survey data from 1998 to 2007, we characterize how exchange rate changes affect the distribution of productivity through three mechanisms. We find that the exchange rate appreciation increases the dispersion of the productivity distribution and decrease the efficiency of resource allocation and aggregate productivity. The distribution of the import intensity may be the main cause for the increase in the productivity dispersion and the deterioration of the industrial resource allocation efficiency, which implies that foreign inputs improve the mean productivity of firms but decrease the resource allocation efficiency. China should tradeoff the gain in productivity and loss in allocation efficiency when it aims to implement a more elastic RMB exchange rate regime