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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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    3. Manova, Kalina & Yu, Zhihong, 2016. "How firms export: Processing vs. ordinary trade with financial frictions," Journal of International Economics, Elsevier, vol. 100(C), pages 120-137.
    4. Tunç, Cengiz & Solakoglu, M. Nihat, 2016. "Does exchange rate volatility matter for international sales? Evidence from US firm level data," Economics Letters, Elsevier, vol. 149(C), pages 152-156.
    5. 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.
    6. Tscheke, Jan, 2016. "Operational Hedging of Exchange Rate Risks," Discussion Papers in Economics 30227, University of Munich, Department of Economics.
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    8. Miao, Zhuang & Li, Yifan, 2017. "Trade Scopes across Destinations: Evidence from Chinese Firm," MPRA Paper 80863, University Library of Munich, Germany, revised 15 Aug 2017.
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    11. 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.
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    25. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.

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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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