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Exchange Rate Volatility, Financial Constraints, and Trade: Empirical Evidence from Chinese Firms

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  • Jérôme Héricourt
  • Sandra Poncet

Abstract

In this paper, we study how firm-level export performance is affected by Real Exchange Rate (RER) volatility and investigate whether this effect depends on existing financial constraints. Our empirical analysis relies on export data for more than 100,000 Chinese exporters over the 2000–6 period. We confirm a trade-deterring effect of RER volatility. We find that firms' decision to begin exporting and the exported value decrease for destinations with a higher exchange rate volatility and that this effect is magnified for financially vulnerable firms. As expected, financial development seems to dampen this negative impact, especially on the intensive margin of export. These results provide micro-founded evidence suggesting that the existence of well-developed financial markets allows firms to hedge exchange rate risk. The results also support a key role of financial constraints in determining the macro impact of RER volatility on real outcomes.

Suggested Citation

  • Jérôme Héricourt & Sandra Poncet, 2015. "Exchange Rate Volatility, Financial Constraints, and Trade: Empirical Evidence from Chinese Firms," The World Bank Economic Review, World Bank, vol. 29(3), pages 550-578.
    • Handle: RePEc:oup:wbecrv:v:29:y:2015:i:3:p:550-578.
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    File URL: http://hdl.handle.net/10.1093/wber/lht035
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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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