Monetary shocks, exchange rates, and the extensive margin of exports

•This paper studies the real exchange rate and the extensive margin of exports.•An open economy Dynamic General Equilibrium model with sticky-prices is developed.•Exchange rate pass-through to consumer prices affects export participation.•A favorable movement in the real exchange rate expands the extensive margin.•The results are consistent with firm-level empirical studies.

This paper develops a two-country Dynamic General Equilibrium model to assess the relationship between the real exchange rate and the extensive margin of exports. Exchange rate pass-through to consumer prices governs the relative strength of a demand channel onto the exporting decision of a firm. With incomplete pass-through, a favorable movement in the real exchange rate generates increased export participation and an expansion in the extensive margin of exports. This result is consistent with firm-level studies, and contributes to an ongoing empirical debate as to the importance of changes in export participation over the business cycle.