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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?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 340, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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  3. Greenaway, David & Guariglia, Alessandra & Kneller, Richard, 2007. "Financial factors and exporting decisions," Journal of International Economics, Elsevier, vol. 73(2), pages 377-395, November.
  4. Bodnar, G.M. & Dumas, B. & Marston, R.C., 1998. "Pass-Through and Exposure," Weiss Center Working Papers 98-01, Wharton School - Weiss Center for International Financial Research.
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  7. Dekle, Robert & Ryoo, Heajin H., 2007. "Exchange rate fluctuations, financing constraints, hedging, and exports: Evidence from firm level data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(5), pages 437-451, December.
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  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," Sciences Po publications info:hdl:2441/9708, Sciences Po.
  12. 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.
  13. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  14. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  15. Strasser, Georg, 2013. "Exchange rate pass-through and credit constraints," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 25-38.
  16. 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.
  17. 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.
  18. 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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