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Exchange rate exposure under liquidity constraints

Author

Listed:
  • Stefano Schiavo

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Sarah Guillou

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - 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.

Suggested Citation

  • Stefano Schiavo & Sarah Guillou, 2014. "Exchange rate exposure under liquidity constraints," SciencePo Working papers Main hal-03429931, HAL.
    • Handle: RePEc:hal:spmain:hal-03429931
    DOI: 10.1093/icc/dtu033
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03429931
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    1. Dai, Mi & Nucci, Francesco & Pozzolo, Alberto F. & Xu, Jianwei, 2021. "Access to finance and the exchange rate elasticity of exports," Journal of International Money and Finance, Elsevier, vol. 115(C).

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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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