A Framework to Analyze the Impact of Exchange Rate: Uncertainty on Output Decisions
Gonzalo Varela ()
Working Paper Series from Department of Economics, University of Sussex Business School
Southern Cone economies exhibit a high record of exchange rate volatility. In this context, rms tend to contract dollar debt, irrespective of their trade orientation, and without available hedging instruments. This exposes them to bankruptcy risk, in the event of large exchange rate movements. This paper provides a framework to analyze the output e ect of exchange rate uncertainty in that context, by focusing on the channel uncertainty-output that operates through the nancial strategy of the rm. We nd that increases in exchange rate uncertainty increase the probability of bankruptcy, thus increasing expected marginal bankruptcy costs, and reducing optimal output of a risk-neutral rm. Furthermore, we nd that rms with higher than average liquidity balances will face lower marginal bankruptcy costs, thus producing more than the average rm. The model displays persistence, as any shock to current pro ts a ects future liquidity balances, and so, future output. This framework can easily be extended to explain the response of other rms' decisions to exchange rate uncertainty, such as investment.
Keywords: Exchange rates; Bankruptcy Costs; Production Under Uncertainty (search for similar items in EconPapers)
JEL-codes: F31 G33 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:sus:susewp:2411
Access Statistics for this paper
More papers in Working Paper Series from Department of Economics, University of Sussex Business School Contact information at EDIRC.
Bibliographic data for series maintained by University of Sussex Business School Communications Team ().