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Exchange Rates and the Working Capital Channel of Trade Fluctuations

Valentina Bruno, Se-Jik Kim and Hyun Song Shin

AEA Papers and Proceedings, 2018, vol. 108, 531-36

Abstract: Exchange rates affect the economy not only through the competitiveness of exports but also through a financial channel. The financial channel goes in the opposite direction to the competitiveness channel in that a stronger currency goes hand-in-hand with more buoyant real economic activity on the back of faster credit growth and cross-border banking flows. The effect is particularly marked for emerging market economies for the broad dollar index: a stronger dollar may actually lead to a decline in trade volumes of an emerging market economy. Our paper develops a stylized model that generates such an effect and finds supporting evidence in a firm-level investigation of manufacturing firms from Asia.

JEL-codes: D22 E44 F14 F31 L60 O14 O16 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pandp.20181063
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