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Exporting strategies of heterogeneous firms subject to export shocks and financial restraints

Author

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  • Virginia Di Nino

    () (IUHEID, The Graduate Institute of International and Development Studies, Geneva)

Abstract

This paper develops an open economy firm-heterogeneous model where the combination of market rigidities and exchange rate uncertainty acts like a barrier to trade and modifies a firm's optimal choice in terms of production and pricing. The existence of price and labour rigidities, coupled with imperfect financial development and exchange rate uncertainty, separates incumbent firms into (1) domestic producers, (2) exporters setting the price in national currency and (3) more productive exporters pricing in foreign currency. The model predicts that only where financial development is limited a reduction in exchange rate uncertainty raises a firm's profit, lowers prices, and induces new firms to export. Fully financially integrated countries are insulated from exchange rate risk.

Suggested Citation

  • Virginia Di Nino, 2008. "Exporting strategies of heterogeneous firms subject to export shocks and financial restraints," IHEID Working Papers 10-2008, Economics Section, The Graduate Institute of International Studies, revised Oct 2008.
  • Handle: RePEc:gii:giihei:heidwp10-2008
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    Keywords

    exchange rate uncertainty; firm heterogeneity; market rigidity; financial restraints.;

    JEL classification:

    • F1 - International Economics - - Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F15 - International Economics - - Trade - - - Economic Integration

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