Exporting strategies of heterogeneous firms subject to export shocks and financial restraints

Virginia Di Nino

No 10-2008, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: This paper develops an open economy firm-heterogeneous model where the combination of market rigidities and exchange rate uncertainty acts like a barrier to trade and modifies a firm's optimal choice in terms of production and pricing. The existence of price and labour rigidities, coupled with imperfect financial development and exchange rate uncertainty, separates incumbent firms into (1) domestic producers, (2) exporters setting the price in national currency and (3) more productive exporters pricing in foreign currency. The model predicts that only where financial development is limited a reduction in exchange rate uncertainty raises a firm's profit, lowers prices, and induces new firms to export. Fully financially integrated countries are insulated from exchange rate risk.

Keywords: exchange rate uncertainty; firm heterogeneity; market rigidity; financial restraints. (search for similar items in EconPapers)
JEL-codes: F1 F12 F15 F16 (search for similar items in EconPapers)
Pages: 28
Date: 2008-10, Revised 2008-10
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