The Chinese University of Hong Kong-Tsinghua University Joint Research Center for Chinese Economy 清華大學-香港中文大學中國經濟聯合研究中心 - Exchange Rate Volatility and Trade: The Role of Credit Constraints The Chinese University of Hong Kong-Tsinghua University <br/>Joint Research Center for Chinese Economy 清華大學-香港中文大學中國經濟聯合研究中心
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Exchange Rate Volatility and Trade: The Role of Credit Constraints
Kang Shi, Shu Lin, Haichun Ye

This study examines the role of credit constraints in determining the trade effect of exchange rate volatility. We first develop a small open economy general equilibrium model with credit constraints. In our model, constrained firms respond to real depreciations and appreciations in an asymmetric way, and exchange rate volatility reduces their exports on average. The effect of exchange rate volatility on unconstrained firms’ exports, however, is ambiguous. Overall, exchange rate volatility has a more negative impact on constrained firms. In a large sector-level bilateral trade dataset, we find robust empirical evidence supporting the predictions of the model. We show that financially more constrained sectors have a more negative exposure of their trade volumes to exchange rate volatility. Moreover, the estimated trade effects of exchange rate volatility vary substantially across sectors and can be either positive or negative depending on the degree of credit constraints.

1067
0023
Exchange Rate Volatility and Trade: The Role of Credit Constraints
Kang Shi, Shu Lin, Haichun Ye

This study examines the role of credit constraints in determining the trade effect of exchange rate volatility. We first develop a small open economy general equilibrium model with credit constraints. In our model, constrained firms respond to real depreciations and appreciations in an asymmetric way, and exchange rate volatility reduces their exports on average. The effect of exchange rate volatility on unconstrained firms’ exports, however, is ambiguous. Overall, exchange rate volatility has a more negative impact on constrained firms. In a large sector-level bilateral trade dataset, we find robust empirical evidence supporting the predictions of the model. We show that financially more constrained sectors have a more negative exposure of their trade volumes to exchange rate volatility. Moreover, the estimated trade effects of exchange rate volatility vary substantially across sectors and can be either positive or negative depending on the degree of credit constraints.

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