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Trade credit and exchange rate risk pass through

Author

Listed:
  • Bryan Hardy
  • Felipe Saffie
  • Ina Simonovska

Abstract

Large firms borrow in foreign currency and are net providers of trade credit to firms in their supply chains. We model the transmission of exchange rate risk via firm balance sheets along the supply chain. Trade credit loosens borrowing constraints and allows for higher production. Furthermore, firms are more likely to pass-through exchange rate shocks to their balance sheets onto their partners the more they are financially constrained. We validate these predictions using a quarterly firm panel for 19 emerging markets. Trade credit constitutes an important transmission mechanism of exchange rate shocks, but firms tend to protect their trading partners.

Suggested Citation

  • Bryan Hardy & Felipe Saffie & Ina Simonovska, 2024. "Trade credit and exchange rate risk pass through," BIS Working Papers 1216, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1216
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    References listed on IDEAS

    as
    1. Valentina Bruno & Se-Jik Kim & Hyun Shin, 2018. "Exchange Rates and the Working Capital Channel of Trade Fluctuations," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 531-536, May.
    2. Margit Reischer, 2019. "Finance-thy-Neighbor. Trade Credit Origins of Aggregate Fluctuations," 2019 Meeting Papers 1129, Society for Economic Dynamics.
    3. Sai Ma & Tim Schmidt-Eisenlohr, 2023. "The Financial Channel of the Exchange Rate and Global Trade," CESifo Working Paper Series 10495, CESifo.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    trade credit; financial constraints; supply chains; exchange rate volatility; imperfect pass through;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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