Will exporters benefit from adopting the euro? The case of Bulgaria

Bulgaria follows a currency board tied to the euro. The analysis of the effects that adopting the euro might have on its export sector is crucial for Bulgaria and other similar Eastern European countries. We extend the model of Neary and Eckel (2010) by incorporating the exchange rate and use it as our analytical framework for our empirical study. We test the model (applying GMM as the estimation method) using a Bulgarian firm-level trade dataset and analyze the role that the real exchange rate plays in the adjustments between and within firms with respect to the volume and price of every variety produced by Bulgarian multi-product firms (MPFs). To our knowledge, our paper is the first to analyze the role of real exchange rate dynamics, both empirically and theoretically, in the spirit of Neary and Eckel’s (2010) model. We have then tried to fill up the gap in the literature by highlighting the capabilities of firms from a low-middle income country such as Bulgaria, to drive flexible manufacturing and focusing on what Neary and Eckel (2010) have called the “intra-firm extensive margin” in response to real exchange rate variability.

Bulgaria, a middle-income country has now more MPFs than single-product firms (SPFs). Thus, MPFs is not only a characteristic of only high-income countries. The contribution of adding and dropping products within a single firm is important to the export sector and the aggregate economy. MPFs benefit from exporting to EU markets by becoming more productive and are encouraged to exporting more product varieties while beating down the costs of producing these new varieties and the cannibalization effect. These MPFs might have in advantage as a result of facing lower exchange rate costs and being better exposed to the acquisition of know-how and technology from participating in EU markets. MPFs cut their product diversity only to non-EU countries to maintain core competence and in response to adverse changes in the exchange rate.