Import and Export Linkages Transmit Volatility Across Markets

Abstract

Firms that trade face volatility in foreign markets. We examine two rm-level channels that transmit foreign volatility to the domestic market. First, if marginal costs are increasing, then a demand shock on the foreign market leads to a reallocation of output on the domestic market. Second, if foreign input prices are volatile compared to domestic input prices, then importers channel input price volatility to the domestic market. Consistent with this theory, Danish rm-level data show that exporting raises a rm’s domestic sales volatility by 13 percent, while importing raises it by 15 percent. Furthermore, rms that export to larger and more volatile foreign markets lower their average domestic sales. These results show that rm-level export and