Advanced Search
MyIDEAS: Login

Exchange Rate Fluctuations, Financing Constraints, Hedging, and Exports: Evidence from Firm Level Data

Contents:

Author Info

  • Heajin Ryoo
  • Robert Dekle

Abstract

An important puzzle in international macroeconomics is the exchange rate disconnect puzzle. Based on recent empirical literature by Mussa (1986), Baxter and Stockman (1989), and Flood and Rose (1995), high exchange rate volatility under floating rates appear not to be related to the high volatility of other macroeconomic variables. However, there is little systematic research examining whether exchange rates affect real quantities at the microeconomic or firm level. In this paper, we examine the exchange rate disconnect puzzle using Japanese firm level data from 1982 to 1997, for 105 firms in the 14 largest export industries at the 4-digit level. We find that export volumes at the firm level are highly responsive to exchange rates. Depending on the industry, a one percent appreciation of the domestic currency results in an average decline in export volumes of 0.02 to 2.9 percent. One explanation given for the small estimated export elasticities in the aforementioned macro-aggregate empirical literature is that prices are sticky in the buyer's currency. From our estimates, we also find export prices in terms of the buyer's currency are sticky. Thus, the increased responsiveness of exports to exchange rate fluctuations in our model is not related to changes in international relative prices. Rather, in our paper, the responsiveness of exports to exchange rate fluctuations arises from a loosening of balance sheet constraints. Suppose that a depreciation in the exporter's currency is positively correlated with a relaxation of balance sheet constrants. With relaxed balance sheet constraints, the exporter with the depreciating currency is then simply able to produce more, regardless of the inflexibiliy of foreign prices. In most industries in our sample-10 out of 14 industries--a currency depreciation is correlated with a relaxation of financing constraints. For these industries, a currency depreciation will be related to a strong expansion in exports, through the relaxation of balance sheet constraints. There are 4 industries in which a currency depreciation is correlated with tightening of financing constraints. However, firms in these industries are able to substantially offset the adverse impace on balance sheets of aggregate shocks through hedging activities. Thus, we observe a positive relationship between a currency depreciation and exports, even in these industries. Our findings of large and significant export elasticities imply that there is no exchange rate disconnect at the firm level. Since our sample of Japanese exporters covers over 90 percent of total Japanese manufacturing exports, the discrepancy between the results obtained at the macro-aggregate level and at the firm level is not simply an artifact of incomplete sample coverage. Rather, the discrepancy suggests that it may be important to include non-linearities related to financing constraints when modeling the relationship between exchange rates and export volumes.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.gsb.columbia.edu/japan/pdf/wp204.pdf
File Function: main text
Download Restriction: no

Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 20.

as in new window
Length:
Date of creation: 11 Aug 2004
Date of revision:
Handle: RePEc:ecm:nawm04:20

Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Email:
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC

Related research

Keywords: Exchange Rate Disconnect; Exports; Hedging.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  2. Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-15, May.
  3. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
  4. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  5. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "A Re-Examination of Exchange Rate Exposure," NBER Working Papers 8128, National Bureau of Economic Research, Inc.
  6. Maurice Obstfeld, 2002. "Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics," NBER Working Papers 9118, National Bureau of Economic Research, Inc.
  7. Andrew B. Bernard & J. Bradford Jensen, 2001. "Why Some Firms Export," NBER Working Papers 8349, National Bureau of Economic Research, Inc.
  8. Michael M. Knetter, 1992. "International Comparisons of Pricing-to-Market Behavior," NBER Working Papers 4098, National Bureau of Economic Research, Inc.
  9. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  10. Kristin J Forbes, 2002. "How Do Large Depreciations Affect Firm Performance?," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 214-238.
  11. Linda Goldberg & Joseph Tracy, 1999. "Exchange Rates and Local Labor Markets," NBER Working Papers 6985, National Bureau of Economic Research, Inc.
  12. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  13. Baxter, M. & Stockman, A.C., 1988. "Business Cycles And The Exchange Rate System: Some International Evidence," RCER Working Papers 140, University of Rochester - Center for Economic Research (RCER).
  14. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
  15. Caporale, Guglielmo Maria & Chui, Michael K F, 1999. "Estimating Income and Price Elasticities of Trade in a Cointegration Framework," Review of International Economics, Wiley Blackwell, vol. 7(2), pages 254-64, May.
  16. Thursby, Jerry G & Thursby, Marie C, 1987. "Bilateral Trade Flows, the Linder Hypothesis, and Exchange Risk," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 488-95, August.
  17. Cushman, David O., 1983. "The effects of real exchange rate risk on international trade," Journal of International Economics, Elsevier, vol. 15(1-2), pages 45-63, August.
  18. Chowdhury, Abdur R, 1993. "Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error-Correction Models," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 700-706, November.
  19. Jia He & Lilian K. Ng, 1998. "The Foreign Exchange Exposure of Japanese Multinational Corporations," Journal of Finance, American Finance Association, vol. 53(2), pages 733-753, 04.
  20. Charles Engel, 2003. "Expenditure Switching and Exchange-Rate Policy," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 231-300 National Bureau of Economic Research, Inc.
  21. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05.
  22. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  23. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
  24. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  25. Wei, Shang-Jin, 1999. "Currency hedging and goods trade," European Economic Review, Elsevier, vol. 43(7), pages 1371-1394, June.
  26. Dominguez, Kathryn M.E. & Tesar, Linda L., 2006. "Exchange rate exposure," Journal of International Economics, Elsevier, vol. 68(1), pages 188-218, January.
  27. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  28. Amemiya, Takeshi, 1977. "The Maximum Likelihood and the Nonlinear Three-Stage Least Squares Estimator in the General Nonlinear Simultaneous Equation Model," Econometrica, Econometric Society, vol. 45(4), pages 955-68, May.
  29. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
  30. George Allayannis & Jane Ihrig & James P. Weston, 2001. "Exchange-Rate Hedging: Financial versus Operational Strategies," American Economic Review, American Economic Association, vol. 91(2), pages 391-395, May.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Sarah Guillou & Stefano Schiavo, 2011. "Exchange Rate Exposure under Liquidity Constraints," Department of Economics Working Papers 1107, Department of Economics, University of Trento, Italia.
  2. Aaditya Mattoo & Arvind Subramanian, 2011. "A China Round of Multilateral Trade Negotiations," Working Paper Series WP11-22, Peterson Institute for International Economics.
  3. Georg H. Strasser, 2011. "Exchange Rate Pass-Through and Credit Constraints: Firms Price to Market as Long as They Can," Boston College Working Papers in Economics 788, Boston College Department of Economics, revised 13 Feb 2012.
  4. Samba Mbaye, 2012. "Beggar-thy-Neighbor Effects of Currency Undervaluation: Is China the Tip of the Iceberg?," Working Papers 201239, CERDI.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ecm:nawm04:20

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.