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Exchange Rate Uncertainty and Firm Profitability

Author

Listed:
  • Christopher F. Baum

    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

  • John T. Barkoulas

    (University of Tennessee)

Abstract

This paper investigates the effects of permanent and transitory components of the exchange rate on firms' profitability under imperfect information. Utilizing a signal extraction framework, we show that the variances of these components of the exchange rate process will have indeterminate effects on the firm's growth rate of profits, but will have predictable effects on its volatility. An increase in the variance of the permanent (transitory) component in the exchange rate process leads to greater (lesser) variability in the growth rate of the firm's profits, thus establishing that the source of exchange rate volatility matters in analyzing its effects. Implications of our theoretical findings for the empirical modeling of the underlying relationships are discussed.

Suggested Citation

  • Christopher F. Baum & Mustafa Caglayan & John T. Barkoulas, 1999. "Exchange Rate Uncertainty and Firm Profitability," Boston College Working Papers in Economics 422, Boston College Department of Economics, revised 16 Feb 2000.
    • Handle: RePEc:boc:bocoec:422
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    References listed on IDEAS

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    More about this item

    Keywords

    exchange rate volatility; profitability;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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