Financial Frictions and Export Dynamics in Large Devaluations
Fernando Leibovici () and
David Kohn ()
No 859, 2017 Meeting Papers from Society for Economic Dynamics
We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. We investigate a small open economy with heterogeneous firms and idiosyncratic productivity shocks, where firms face financing constraints and debt can be denominated in domestic or foreign units. In our model, a real depreciation affects firms through two channels. On the one hand, it increases the returns to selling internationally, making exporting more profitable. On the other hand, it tightens the borrowing constraint by increasing the value of foreign-denominated debt relative to firms’ net worth. We calibrate the model to match key features from plant-level data and use it to quantify the importance of these channels. We find that financial frictions slow down the response of aggregate exports, and foreign-denominated debt amplifies this effect by decreasing firms’ net worth on impact. However, we find that these channels can only explain a small fraction of the dynamics of exports observed in the data. While financial frictions and balance-sheet effects distort production and investment decisions, exports are significantly less affected as firms reallocate sales across markets in response to the change in the real exchange rate. We document the importance of cross-market reallocation for export dynamics using firm-level data from Mexico’s devaluation in 1994.
New Economics Papers: this item is included in nep-acc, nep-bec, nep-dge, nep-int and nep-opm
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Working Paper: Financial Frictions and Export Dynamics in Large Devaluations (2019)
Working Paper: Financial Frictions and Export Dynamics in Large Devaluations (2018)
Working Paper: Financial Frictions and Export Dynamics in Large Devaluations (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:859
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