Finance dependence and exchange rate pass-through: Empirical evidence from China

Chenghao Hu

Emerging Markets Review, 2024, vol. 58, issue C

Abstract: Does the degree of finance dependence, defined as firms' reliance on external finance for regular production activities, determine exporters' heterogeneous responses to real exchange rate shocks? This paper develops a stylized model to illustrate the role of finance dependence in shaping exporters' pricing decisions when the bilateral real exchange rate fluctuates. The model features distribution costs, endogenous markup, and firm heterogeneity. In the model, finance dependence can impact firms' export pricing decisions in a way isomorphic to firm productivity but in the opposite direction: firms with high finance dependence have a high demand elasticity and a low price elasticity to exchange rate fluctuations. Therefore, in response to real exchange rate shocks, financially more dependent firms exhibit lower exchange rate pass-through into export prices denominated in home country currency (RMB). To assess the model prediction, I develop a firm-destination-year-specific measure of finance dependence based on the basket of goods that firms export and employ the Chinese manufacturing firm export data from 2000 to 2006 for analysis. The empirical test is carried out at the most disaggregated firm-product-destination level and confirms the model prediction.

Keywords: Exchange rate pass-through; Finance dependence; Endogenous markup; Distribution costs; Real exchange rate shocks (search for similar items in EconPapers)
JEL-codes: D22 F14 F31 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014123000936
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:58:y:2024:i:c:s1566014123000936

DOI: 10.1016/j.ememar.2023.101088

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().