Exchange Rate Exposure under Liquidity Constraints

Sarah Guillou and Stefano Schiavo

No 1107, Department of Economics Working Papers from Department of Economics, University of Trento, Italia

Abstract: We develop a simple model where exporting firms are characterized by het- erogeneous productivity and may face a liquidity constraint, which in turn is affected by exchange rate changes. This setup is used to analyze exchange rate exposure, i.e. the sensitivity of profits to exchange rate changes, and to derive testable implications that we bring to the data. The key innovation of our setup is to assume that exchange rate changes can either boost or depress liquidity: this allows us to study exposure profits under different scenarios. We find that profits of more productive firms should be more sensitive to ex- change rate fluctuations. Moreover, an increase in the cost of external funds (relative to cash flow) makes profits less sensitive to exchange rate shocks for firms whose liquidity is positively affected by an appreciation of the exchange rate. We test these predictions derived from the model using a large dataset of French exporting firms. Results confirm that exposure tends to increase with productivity but in a non linear way. Furthermore, empirical results confirm that for firm whose cash flow is negatively correlated with exchange rate movements, an increase in financial costs lowers exposure.

Keywords: export; exchange rate; exposure; financial constraints; heterogeneity; productivity (search for similar items in EconPapers)
JEL-codes: F23 F31 G32 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ifn and nep-opm
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Related works:
Journal Article: Exchange rate exposure under liquidity constraints (2014)
Working Paper: Exchange rate exposure under liquidity constraints (2014)
Working Paper: Exchange rate exposure under liquidity constraints (2014)
Working Paper: Exchange rate exposure under liquidity constraints (2011)
Working Paper: Exchange rate exposure under liquidity constraints (2011)
Working Paper: Exchange rate exposure under liquidity constraints (2011)
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