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The Causal Effects of Expected Depreciations

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Abstract

We estimate the causal effects of a shift in the expected future exchange rate of a local currency against the US dollar on a representative sample of firms in an open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. The treatment is effective in shifting exchange rate and inflation expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we find that the treatment affects the dynamics of export and import quantities and prices at the firm level, with differential effects for exports to destination countries that use the US dollar as their currency. We instrument exchange rate expectations with the variation induced by the treatment and estimate a positive elasticity of a future expected depreciation in import expenditures.

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  • Martha Elena Delgado & Juan Herreño & Marc Hofstetter & Mathieu Pedemonte, 2024. "The Causal Effects of Expected Depreciations," Working Papers 24-07, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:97957
    DOI: 10.26509/frbc-wp-202407
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    More about this item

    Keywords

    expectations; exchange rate; firms;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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