Financial Frictions and Export Dynamics in Large Devaluations

David Kohn, Fernando Leibovici and Michal Szkup

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. In standard models of international trade, exports increase immediately following a large devaluation; in contrast, aggregate exports respond sluggishly in the data. 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 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. When accounting for the observed heterogeneity in export intensity across exporters, these channels explain a large share of the gap between the data and the frictionless model.

Keywords: international trade; financial frictions; borrowing constraints; large devaluations; export elasticity; export dynamics; quantitative (search for similar items in EconPapers)
JEL-codes: F1 F4 G32 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015-05
New Economics Papers: this item is included in nep-dge and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Financial frictions and export dynamics in large devaluations (2020)
Working Paper: Financial Frictions and Export Dynamics in Large Devaluations (2018)
Working Paper: Financial Frictions and Export Dynamics in Large Devaluations (2017)
Working Paper: Financial Frictions and Export Dynamics in Large Devaluations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2015_2

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