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Exchange rate exposure under liquidity constraints

Stefano Schiavo and Sarah Guillou ()

Sciences Po publications from Sciences Po

Abstract: This article presents a simple model in which exporting firms are heterogeneous, both in terms of productivity and liquidity, with the latter being affected by exchange rate changes. This configuration is used to analyze the profits sensitivity to exchange rate changes. The originality of the article lies in the assumption that exchange rate shocks can either boost or depress liquidity, thus allowing one to study exposure in different scenarios. The model predicts that the sensitivity of a firm’s profits to exchange rate changes depends on its financial condition: an increase in the cost of external funds makes profits less sensitive to exchange rate shocks when a firm’s liquidity decreases following a depreciation of the domestic currency. The predictions of the model are tested using a large data set of French exporting firms: results confirm that for firms whose liquidity is negatively correlated with exchange rate movements, an increase in financial costs lowers exposure.

JEL-codes: F23 F31 G32 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-mst
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Published in Industrial and Corporate Change, 2014, vol. 23, pp.1541-1561

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Related works:
Journal Article: Exchange rate exposure under liquidity constraints (2014) Downloads
Working Paper: Exchange rate exposure under liquidity constraints (2011) Downloads
Working Paper: Exchange rate exposure under liquidity constraints (2011) Downloads
Working Paper: Exchange rate exposure under liquidity constraints (2011) Downloads
Working Paper: Exchange Rate Exposure under Liquidity Constraints (2011) Downloads
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