Exporters and Shocks: Dissecting the International Elasticity Puzzle

Aggregate exports are not very responsive to real exchange rates, though they re-
spond strongly to trade liberalizations, a fact sometimes referred to as the International
Elasticity Puzzle. We use micro data on firms and exports for Ireland to dissect the
puzzle. Our identification strategy uses within-firm-year cross-market variation in real
exchange rates and tariffs to identify the responses of export participation, export rev-
enue and the product dimension of exporting to these variables. We show that (i) the
weak response of export revenue of long-time market participants to real exchange rates
is key to the behavior of aggregate exports, (ii) export participation also responds less
to real exchange rates than to tariffs, but this alone cannot explain the puzzle; and
(iii) the revenue response of long-time market participants cannot be accounted for by
product entry responses. Hence any model that can successfully account for the puzzle
needs to match the intensive margin responses of exporting firms.