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

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  • 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.

Suggested Citation

  • Heajin Ryoo & Robert Dekle, 2004. "Exchange Rate Fluctuations, Financing Constraints, Hedging, and Exports: Evidence from Firm Level Data," Econometric Society 2004 North American Winter Meetings 20, Econometric Society.
  • Handle: RePEc:ecm:nawm04:20
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    Cited by:

    1. Sarah Guillou & Stefano Schiavo, 2014. "Exchange rate exposure under liquidity constraints," Industrial and Corporate Change, Oxford University Press, vol. 23(6), pages 1541-1561.
    2. Bo Tang, 2015. "Exchange Rate Exposure of Chinese Firms at the Industry and Firm Level," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 592-607, August.
    3. Song, Sangcheol & Lee, Seung-Hyun & Makhija, Mona, 2015. "Operational hedging in foreign direct investments under volatile and divergent exchange rates across countries," Journal of World Business, Elsevier, vol. 50(3), pages 548-557.
    4. Aaditya Mattoo & Arvind Subramanian, 2011. "A China Round of Multilateral Trade Negotiations," Working Paper Series WP11-22, Peterson Institute for International Economics.
    5. repec:ecb:ecbwps:20141801 is not listed on IDEAS
    6. Ezeanyeji Clement I. & Onwuteaka Ifeoma. C., 2016. "Determinants of Exchange Rate Sensitivity on the Nigerian Manufacturing Sector," Economy, Asian Online Journal Publishing Group, vol. 3(1), pages 40-50.
    7. Strasser, Georg, 2013. "Exchange rate pass-through and credit constraints," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 25-38.
    8. Robert Dekle & Hyeok Jeong & Heajin H. Ryoo, 2016. "Firm-Level Heterogeneity and the Aggregate Exchange Rate Effect on Exports," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 435-447, September.
    9. Bin Qiu & Kuntal K. Das & W. Robert Reed, 2016. "The Effect of Exchange Rates on Chinese Trade: A Dual Margin Approach," Working Papers in Economics 16/17, University of Canterbury, Department of Economics and Finance.
    10. Samba Mbaye, 2012. "Beggar-thy-Neighbor Effects of Currency Undervaluation: Is China the Tip of the Iceberg?," Working Papers halshs-00761380, HAL.
    11. 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.
    12. Pasrun Adam & Pasrun Adam & Rosnawintang Rosnawintang & Ambo Wonua Nusantara & Abd Aziz Muthalib, 2017. "A Model of the Dynamic of the Relationship between Exchange Rate and Indonesia’s Export," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 255-261.
    13. repec:kap:sbusec:v:49:y:2017:i:3:d:10.1007_s11187-017-9849-7 is not listed on IDEAS
    14. Abu Hatab, Assem & Hess, Sebastian, 2013. "Opportunities and Constraints for Small Agricultural Exporters in Egypt," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IFAMA), vol. 16(4).
    15. di Mauro, Filippo & Demian, Calin-Vlad, 2015. "The exchange rate, asymmetric shocks and asymmetric distributions," Working Paper Series 1801, European Central Bank.
    16. repec:eee:reveco:v:51:y:2017:i:c:p:417-430 is not listed on IDEAS
    17. Cueyt SEVIM & Taylan Taner DOGAN, 2016. "Turkiye Ekonomisinde Ihracat ve Doviz Kuru Oynakligi Iliskisi," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 16(2), pages 303-318.
    18. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h561m4g1g is not listed on IDEAS
    19. Kosaka, Michiru Sakane, 2014. "Financial constraints, firm entry, and exchange rate pass-through," Economics Letters, Elsevier, vol. 125(1), pages 143-147.

    More about this item

    Keywords

    Exchange Rate Disconnect; Exports; Hedging.;

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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