Credit constraints, currency depreciation and international trade

Jie Li (), Liping Lan and Zhigang Ouyang

Journal of International Money and Finance, 2020, vol. 104, issue C

Abstract: We document multi-sector exporters’ heterogeneous responses to home currency depreciation. Following currency depreciation, firms tend to export relatively less in sectors that depend more on external financing, to avoid adverse impacts of potentially binding credit constraints. More specifically, credit-constrained exporters respond to currency depreciation by increasing production first in sectors with less external financing dependence, then in sectors that are more dependent on outside funds, until they exhaust their limited financial resources. These findings are consistent with our prior that exporters’ needs for external financing are greater when their home currencies depreciate. Upon home currency depreciation, exporters react by expanding production or by entering new destination markets, incurring significant upfront costs. The results survive a series of robustness checks, and are stronger for low-performance firms and for firms engaged in ordinary trade. The results have important policy implications for emerging market countries that rely heavily on exports but have weak financial institutions.

Keywords: Credit constraints; Exchange rates; International trade; Financial vulnerability (search for similar items in EconPapers)
JEL-codes: F1 G2 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:104:y:2020:i:c:s0261560619305376

DOI: 10.1016/j.jimonfin.2020.102175

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