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Exchange rate fluctuations, financing constraints, hedging, and exports: Evidence from firm level data

Ryoo, Heajin; Dekle, Robert

An important puzzle in international macroeconomics is the exchange rate disconnect puzzle. Nominal exchange rates seem to be unrelated to other macroeconomic variables, for example, export quantities. This paper uses Japanese firm level data to examine whether exchange rate fluctuations are strongly related to the export quantities of firms. We build a simultaneous nonlinear structural model with external financing costs, and estimate the model on 14 separate Japanese 4 digit level industries. We find that export volumes at the firm level are significantly affected by exchange rate fluctuations. We find higher elasticit ies of exports with respect to exchange rates than in previous work. Our results cast some doubt on the prevailing wisdom that exchange rates have no effect on trade. Finally, we find in our data that financing constraints play an important role in affecting the sensitivity of exports to exchange rate fluctuations. Firms that are less financially constrained-for example, keiretsu firms-tend to have lower exchange rate elasticities, which is consistent with our model.

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Academic Units
Center on Japanese Economy and Business
Publisher
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Series
Center on Japanese Economy and Business Working Papers, 204
Published Here
February 11, 2011