Exchange rate pass-through and credit constraints

The macroeconomic evidence of the short-term impact of exchange rates on exports and prices is notoriously weak. This paper examines the microfoundations of this disconnect. I study the response of firms' export and price setting decisions to fluctuations in exchange rates and credit conditions...

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Bibliographic Details
Published in:Journal of monetary economics 2013-01, Vol.60 (1), p.25-38
Main Author: Strasser, Georg
Format: Article
Language:English
Subjects:
Borrowing
Exports
Foreign exchange rates
Impact analysis
Macroeconomics
Prices
Studies
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Summary:The macroeconomic evidence of the short-term impact of exchange rates on exports and prices is notoriously weak. This paper examines the microfoundations of this disconnect. I study the response of firms' export and price setting decisions to fluctuations in exchange rates and credit conditions using firm-level survey data. Financially constrained firms pass through exchange rate changes to prices at almost twice the rate of unconstrained firms. Similarly, their export volumes are about twice as sensitive to exchange rate fluctuations. The effect of borrowing constraints is particularly strong during the recent financial crisis. ► Effect of credit constraints on exchange rate pass-through and exports. ► Firm-level survey data on exports, prices, and borrowing constraints. ► Less exchange rate disconnect of exports for financially constrained firms. ► Constrained firms pass through exchange rate changes at twice the rate of other firms. ► Borrowing constraints affect pricing decisions, especially during financial crisis.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2012.10.013