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  5. Exchange Rate Pass-Through and Macroeconomy
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Exchange Rate Pass-Through and Macroeconomy

Paper Session

Friday, Jan. 5, 2024 10:15 AM - 12:15 PM (CST)

Marriott Rivercenter, Conference Room 6
Hosted By: International Economics and Finance Society
  • Chair: Annie Soyean Lee, Johns Hopkins University

Trade Credit and Exchange Rate Risk Pass Through

Bryan Hardy
,
Bank for International Settlements
Felipe Saffie
,
University of Virginia
Ina Simonovska
,
University of California-Davis, NBER and CEPR

Abstract

We show that trade credit mitigates exchange rate risk pass through along supply chains. We develop a theory of trade credit provision along supply chains that involve large intermediate-good suppliers and small final-good producers, both of which face bank borrowing constraints. Motivated by empirical findings, we assume that large suppliers borrow in foreign currency, while small final-good producers borrow in domestic currency at higher rates. Trade credit loosens borrowing constraints and allows for higher production scale. Additionally, the model predicts that unconstrained suppliers fully absorb increasing costs of borrowing in foreign currency when domestic currency depreciates: specifically, suppliers settle for lower profits but maintain unchanged trade credit lines with their trade partners. We verify the model’s predictions using firm-level data for over 11,000 large firms in 19 emerging markets over the 2004-2020 period.

Liability Dollarization and Exchange Rate Pass-Through

Junhyong Kim
,
Korea Development Institute
Annie Soyean Lee
,
Johns Hopkins University

Abstract

We explore the negative balance sheet effect of foreign currency borrowing on the exchange rate pass-through to domestic prices. Exploiting a large devaluation episode in Korea in 1997, we empirically document that a sector with higher foreign currency debt exposure prior to the crisis experienced a larger price increase. Building a heterogeneous firm model with financial constraints, we quantify the role of foreign currency liabilities in explaining the exchange rate pass-through to prices and find that 15% to 30% of the sectoral price changes during the crisis can be explained by the balance sheet effect of foreign currency debt alone.

The Financial Channel of the Exchange Rate and Global Trade

Sai Ma
,
Federal Reserve Board
Tim Schmidt-Eisenlohr
,
Federal Reserve Board and CESifo

Abstract

This paper provides evidence that the U.S. dollar affects trade through a financial channel of the exchange rate. Using global data over three decades on trade between countries whose currency is not the U.S. dollar, it shows that a dollar appreciation increases import prices and decreases import quantities. In line with a financial channel, these effects are stronger when the exporting country borrows more in U.S. dollars abroad. The financial channel was active before the global financial crisis but has strengthened since. Instrumenting the dollar is key to uncovering the full effect of the financial channel.

Markets and Markups: A New Empirical Framework and Evidence on Exporters from China

Giancarlo Corsetti
,
European University Institute and CEPR
Meredith Crowley
,
University of Cambridge and CEPR
Lu Han
,
Bank of Canada and CEPR
Huasheng Song
,
Zhejiang University

Abstract

Firms that dominate global trade export to multiple countries and frequently change their foreign destinations. We develop a new empirical framework for analysing markup elasticities to the exchange rate in this environment. The framework embodies a new estimator of these elasticities that controls for endogenous market participation and a new classification of products based on Chinese linguistics to proxy for firms’ power in local markets. Applying this framework to Chinese customs data, we document significant pricing-to-market for highly differentiated goods. Measured in the importer’s currency, the prices of highly differentiated goods are far more stable than those of less differentiated products.

Discussant(s)
Matteo Cacciatore
,
HEC Montréal
Matias Moretti
,
University of Rochester
Felipe Saffie
,
University of Virginia
Jeffrey Campbell
,
University of Notre Dame
JEL Classifications
  • F3 - International Finance
  • F4 - Macroeconomic Aspects of International Trade and Finance