Financial Market Imperfections and the Impact of Exchange Rate Movements on Exports*

Abstract

International audienceThis paper analyzes empirically the role of financial market imperfections in the way countries' exports react to a currency depreciation. Using quarterly data for 27 developed and developing countries over the period 1990-2005, we find that the impact of a depreciation on exports will be less positive--or even negative--for a country if: (i) firms borrow in foreign currency; (ii) they are credit constrained; (iii) they are specialized in industries that require more external capital; (iv) the magnitude of depreciation or devaluation is large. This last result emphasizes the existence of a nonlinear relationship between an exchange rate depreciation and the reaction of a country's exports when financial imperfections are observed. This offers a new explanation for the consequences of recent currency crises in middle-income countries

Exchange Rate Policy and Export Performance in Efficiency-Driven Economies

“…However, contrary findings were presented in studies done by Lizondo and Montiel (1989), Calvo and Reinhart (2000), Musila (2002), Frankel (2005 and Berman and Berthou (2009), where currency weakness was found to have either a negative effect on export performance, or little effect.…”

On the Suitability of Alternative Competitiveness Indicators for Explaining Real Exports of Advanced Economies

“…1 Ratnaike (2012) finds trade policy to be largely insignificant in determining export performance. Berthou (2009) andWierts, Van Kerkhoff, andDe Haan (2014) provide evidence of the price elasticity of exports being affected by financial market imperfections and the share of high technology exports, respectively.…”

Beggar-Thy-Neighbor Effects of Currency Undervaluation: Is China the Tip of the Iceberg?

“…A first study by Eichengreen and Tong (2011) examined the effect of official announcements of future renminbi revaluations on foreign firms' stock-market valuations and found significant valuation effects depending on firms' relationships with Chinese firms, sectors and 4 We restrict the discussion here to empirical papers on the exchange rate-trade balance relationship. Other related studies include the vast empirical literature on the exports reaction to exchange rate changes (Berman and Berthou, 2009;Fang et al, 2006 andCarranza et al, 2003 among others) which generally report small trade elasticities; the recent micro-evidence on the trade impact of exchange rates (Berman et al, 2012;Dekle and Ryoo, 2007;Forbes, 2002 inter alia); and papers on the trade effects of exchange rate volatility (see for example Chit et al, 2010). dependence on external finance.…”

“…Three main arguments are generally brought forth to justify such a belief: (i) a depreciation of the currency is not necessarily translated into corresponding price incentives, as the pass-through of exchange rate changes to import prices is known to be incomplete (see Gust et al, 2006;Betts and Devereux, 2000 among others), 2 (ii) exporters could be left worse-off after a devaluation if they borrow in foreign currency or incur foreign-currency-denominated sunk costs when exporting (Berman and Berthou, 2009;Galindo et al, 2003 inter alia), and finally (iii) with the development of global supply chains and the implied interconnection between exports and imports, the trade balance response to exchange rate changes tends to be considerably reduced (Koopman et al, 2012;IMF, 2012). 3 These findings have been backed up by somewhat mixed evidence on the impact of exchange rate changes on the domestic trade balance (see Rose and Yellen, 1989 for example).…”