Journal of Monetary Economics2013-09-05 2:57 AM

Exchange rate pass-through and credit constraints: Firms price to market as long as they can

Highlights • The data in the paper lacks information on prices and the destination of exports. • There are omitted variables correlated with credit sentiment that can potentially impact results. • I sketch a few channels through which financial factors can impact pass-through. Abstract This paper contributes to the literature that examines the link between trade and finance. The trade collapse that occurred at the peak of the Great Recession, soon after the Lehman collapse in late 2008 and early 2009, has sparked an important debate on the role of financial factors in explaining trade flows. Papers that have contributed to this literature include Amiti and Weinstein (2011), Rappoport, Schnabl, Wolfenzon (2011), Antras and Foley (2011), among others. Most of this literature focuses on trade volumes and less on prices. Also, the focus is on studying the response to certain large shocks. This paper contributes to this literature by evaluating the role of financial constraints in the response of firm prices and quantity exported to exchange rate shocks. The author concludes, based on empirical evidence, that financially constrained firms pass-through more of the exchange rate shock into prices compared to financially unconstrained firms. That is, consider the case of a depreciation of the dollar relative to the Euro by 10%. A European firm will want to raise dollar prices to accommodate the relative cost shock. The evidence indicates that more financially constrained firms raise dollar prices by more than unconstrained firms. Consequently, the quantities respond more for financially constrained firms than unconstrained firms.

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Journal of Monetary Economics

The Journal of Monetary Economics is a peer-reviewed academic journal covering research on macroeconomics and monetary economics. It is published by Elsevier and was established in October 1973 by Karl Brunner and Charles I. Plosser.

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