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Domestic and Foreign Sales: Complements or Substitutes?

How and why are the dynamics of foreign and domestic sales correlated at the firm level? The empirical answers to the question, which have bearings on the transmission of shocks and on the design of stabilization policies, are rather mixed. Some papers argue for a positive correlation, based on the impact of liquidity constraints in financing exports; others conclude for a negative correlation induced by capacity constraints. Taking advantage of a sample of Italian manufacturing firms over 2001–2012, we show that the sign of the average correlation varies over the business cycle, depending on changes in the relative severity of liquidity, credit and capacity constraints.