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Exchange Rate Exposure under Liquidity Constraints

  • Sarah Guillou
  • Stefano Schiavo

    ()

We develop a simple model where exporting firms are characterized by het- erogeneous productivity and may face a liquidity constraint, which in turn is affected by exchange rate changes. This setup is used to analyze exchange rate exposure, i.e. the sensitivity of profits to exchange rate changes, and to derive testable implications that we bring to the data. The key innovation of our setup is to assume that exchange rate changes can either boost or depress liquidity: this allows us to study exposure profits under different scenarios. We find that profits of more productive firms should be more sensitive to ex- change rate fluctuations. Moreover, an increase in the cost of external funds (relative to cash flow) makes profits less sensitive to exchange rate shocks for firms whose liquidity is positively affected by an appreciation of the exchange rate. We test these predictions derived from the model using a large dataset of French exporting firms. Results confirm that exposure tends to increase with productivity but in a non linear way. Furthermore, empirical results confirm that for firm whose cash flow is negatively correlated with exchange rate movements, an increase in financial costs lowers exposure.

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Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 1107.

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Date of creation: 2011
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Handle: RePEc:trn:utwpde:1107
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  1. Buch, Claudia M. & Kesternich, Iris & Lipponer, Alexander & Schnitzer, Monika, 2010. "Exports Versus FDI Revisited: Does Finance Matter?," CEPR Discussion Papers 7839, C.E.P.R. Discussion Papers.
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  3. David H. Good & M. Ishaq Nadiri & Robin C. Sickles, 1996. "Index Number and Factor Demand Approaches to the Estimation of Productivity," NBER Working Papers 5790, National Bureau of Economic Research, Inc.
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  5. Muller, Aline & Verschoor, Willem F.C., 2006. "Foreign exchange risk exposure: Survey and suggestions," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 385-410, October.
  6. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "Multilateral Comparisons of Output, Input, and Productivity Using Superlative Index Numbers," Economic Journal, Royal Economic Society, vol. 92(365), pages 73-86, March.
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  9. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  10. Lionel Nesta & Flora Bellone & Patrick Musso & Stefano Schiavo, 2008. "Financial Constraints and Firm Export Behavior," Sciences Po publications 16, 2008, Sciences Po.
  11. Sarah Guillou & Stefano Schiavo, 2009. "Tarification au marché et variation des marges à l'exportation. Une étude des prix d'exportation allemands, français et italiens," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 165-184.
  12. Dekle, Robert & Ryoo, Heajin, 2003. "Exchange Rate Fluctuations, Financing Constraints, Hedging, and Exports: Evidence from Firm Level Data," CEI Working Paper Series 2003-13, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  13. Strasser, Georg, 2013. "Exchange rate pass-through and credit constraints," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 25-38.
  14. Greenaway, David & Guariglia, Alessandra & Kneller, Richard, 2007. "Financial factors and exporting decisions," Journal of International Economics, Elsevier, vol. 73(2), pages 377-395, November.
  15. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  16. Maria Bas & Antoine Berthou, 2012. "The Decision to Import Capital Goods in India: Firms' Financial Factors Matter," World Bank Economic Review, World Bank Group, vol. 26(3), pages 486-513.
  17. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 437-492.
  18. David Greenaway & Richard Kneller & Xufei Zhang, 2010. "The Effect of Exchange Rates on Firm Exports: The Role of Imported Intermediate Inputs," The World Economy, Wiley Blackwell, vol. 33(8), pages 961-986, 08.
  19. Minetti, Raoul & Zhu, Susan Chun, 2011. "Credit constraints and firm export: Microeconomic evidence from Italy," Journal of International Economics, Elsevier, vol. 83(2), pages 109-125, March.
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