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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.

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  • Jérôme Héricourt & Sandra Poncet, 2015. "Exchange Rate Volatility, Financial Constraints, and Trade: Empirical Evidence from Chinese Firms," World Bank Economic Review, World Bank Group, vol. 29(3), pages 550-578.
  • Handle: RePEc:oup:wbecrv:v:29:y:2015:i:3:p:550-578.
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    2. Gabriel Pino & Dilara Tas & Subhash C. Sharma, 2016. "An investigation of the effects of exchange rate volatility on exports in East Asia," Applied Economics, Taylor & Francis Journals, vol. 48(26), pages 2397-2411, June.
    3. Daniel Goya, 2014. "The Multiple Impacts of the Exchange Rate on Export Diversification," Cambridge Working Papers in Economics 1436, Faculty of Economics, University of Cambridge.
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    5. repec:wsi:jicepx:v:06:y:2015:i:01:n:s1793993315500040 is not listed on IDEAS
    6. Manova, Kalina & Yu, Zhihong, 2016. "How firms export: Processing vs. ordinary trade with financial frictions," Journal of International Economics, Elsevier, pages 120-137.
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    8. repec:eee:rujoec:v:3:y:2017:i:3:p:280-295 is not listed on IDEAS
    9. Tan, Madeleine Sui-Lay, 2016. "Policy coordination among the ASEAN-5: A global VAR analysis," Journal of Asian Economics, Elsevier, pages 20-40.
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    11. Jérôme Héricourt & Clément Nedoncelle, 2016. "How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications," Working Papers 2016-05, CEPII research center.
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    17. Jérôme Héricourt & Clément Nedoncelle, 2016. "How Multi-Destination Firms Shape the Effect of Exchange Rate Volatility on Trade: Micro Evidence and Aggregate Implications," Working Papers 2016-05, CEPII research center.
    18. Nguyen, Ha & Duncan, Alan, 2015. "Macroeconomic fluctuations in home countries and immigrants’ well-being: New evidence from Down Under," MPRA Paper 69593, University Library of Munich, Germany, revised Feb 2016.
    19. Obeng, Camara Kwasi, 2017. "Is the effect of exchange rate volatility on export diversification symmetric or asymmetric? Evidence from Ghana," MPRA Paper 79027, University Library of Munich, Germany.
    20. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.
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    More about this item

    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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