Exchange Rate Pass-Through and Credit Constraints
نویسنده
چکیده
The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firms’ export and price setting decisions in response to fluctuations in exchange rates and credit conditions using German firm survey data. Firmlevel data on pricing and export expectations enables me to measure the instantaneous response of each firm to changing financial constraints and the EUR/USD exchange rate, which avoids endogeneity issues. I find that primarily large firms cause the exchange rate “puzzles” in aggregate data. The exchange rate disconnect disappears for financially constrained firms. For these firms, the pass-through rate of exchange rate changes to prices is more than twice the rate of unconstrained firms. Similarly, their export volumes are about twice as sensitive to exchange rate fluctuations. Credit therefore affects not only exports via trade finance, but also international relative prices by constraining the scope of feasible pricing policies. The effect of borrowing constraints is particularly strong during the recent financial crisis. Acknowledgments: This paper was prepared for the Carnegie-Rochester Conference Series on Public Policy. For comments and suggestions on an earlier draft I thank the ifo business cycle group, as well as Kit Baum, Kai Carstensen, and Simon Gilchrist. I thank the ifo Institute Munich for its hospitality and for granting me access the micro data of the ifo business survey.
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