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Exchange rate volatility and trade responsiveness of international firms

Author

Listed:
  • Udo Broll

    (Technische Universita ?t Dresden, Germany)

  • Soumyatanu Mukherjee

    (Indian Institute of Management Kozhikode)

  • Rudra Sensarma

    (Indian Institute of Management Kozhikode)

Abstract

This paper analyses, for the first time, trade responsiveness of the international firms (under nohedging possibilities) linked to both domestic and foreign markets simultaneously, with respect to the random fluctuations in foreign (spot) exchange rates. Uncertainties in the spot exchange rates impart production decisions of the firm. In sum, the firm’s elasticity of risk aversion with respect to the standard deviation (or the mean) of the firm’s end-period random profit determines the direction of the impact of exchange rate volatility on trade. The analytical model is quantitatively extended, using data from Indian service sector (non-financial) firms over 2004-2015, to empirically estimate the risk-aversion elasticities owing to the exchange rate shocks, for the first time.

Suggested Citation

  • Udo Broll & Soumyatanu Mukherjee & Rudra Sensarma, 2016. "Exchange rate volatility and trade responsiveness of international firms," Working papers 212, Indian Institute of Management Kozhikode.
    • Handle: RePEc:iik:wpaper:212
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    References listed on IDEAS

    as
    1. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 437-492.
    2. Matteo Bugamelli & Luigi Infante, 2003. "Sunk Costs of Exports," Temi di discussione (Economic working papers) 469, Bank of Italy, Economic Research and International Relations Area.
    3. Arize, Augustine C. & Osang, Thomas & Slottje, Daniel J., 2008. "Exchange-rate volatility in Latin America and its impact on foreign trade," International Review of Economics & Finance, Elsevier, vol. 17(1), pages 33-44.
    4. Broll, Udo & Wahl, Jack E. & Wong, Wing-Keung, 2006. "Elasticity of risk aversion and international trade," Economics Letters, Elsevier, vol. 92(1), pages 126-130, July.
    5. Udo Broll & Bernhard Eckwert, 1999. "Exchange Rate Volatility and International Trade," Southern Economic Journal, John Wiley & Sons, vol. 66(1), pages 178-185, July.
    6. Udo Broll & Soumyatanu Mukherjee, 2016. "International trade and risk aversion elasticities," Discussion Papers 2016-17, University of Nottingham, GEP.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Broll, Udo & Mukherjee, Soumyatanu, 2017. "International trade and firms' attitude towards risk," Economic Modelling, Elsevier, vol. 64(C), pages 69-73.

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    More about this item

    Keywords

    Two-moment model; exports; imported intermediate inputs; exchange rate volatility; revenue risk; elasticities of risk aversion.;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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