Exchange Rate Effects on Firm Performance: A NICER Approach

Nuwat Nookhwun, Jettawat Pattararangrong and Phurichai Rungcharoenkitkul

No 1266, BIS Working Papers from Bank for International Settlements

Abstract: Under dominant currency pricing, exchange rate swings affect firms' profits in domestic currency rather than price competitiveness. We quantify these valuation effects by constructing firm-specific exchange rates that reflect invoicing currencies and capture cash-flow exposures. These net-invoice-currency-weighted exchange rates (NICER) outperform trade-weighted exchange rates in explaining firm profitability, particularly for smaller exporters. Higher trade dependency amplifies NICER sensitivities, while financial hedging only partially mitigates them. NICER fluctuations also impact firm liquidity and credit conditions, with large exporters offsetting liquidity shocks through external financing. These cash-flow effects, in turn, drive exporters' investment and employment decisions.

Keywords: exchange rates; valuation effects; dominant currency paradigm; firm-level data; firm profitability; invoicing currency; exports; financial hedging (search for similar items in EconPapers)
JEL-codes: E44 F31 F41 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-mon
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Working Paper: Exchange Rate Effects on Firm Performance: A NICER Approach (2025)
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