Premio Anual de Investigación Económica “Dr. Raúl Prebisch”

Financial Frictions and Export Dynamics in Large Devaluations

David Kohn

2016-06-02 - We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. We investigate a small open economy with heterogeneous firms and idiosyncratic productivity shocks, where firms face financing constraints and debt can be denominated in domestic or foreign units. In our model, a real depreciation affects firms through two channels. On the one hand, it increases the returns to selling internationally, making exporting more profitable. On the other hand, it tightens the borrowing constraint by increasing the value of foreign-denominated debt relative to firms’ net worth. We calibrate the model to match key features from plant-level data and use it to quantify the importance of these channels. We find that financial frictions slow down the response of aggregate exports, and foreign-denominated debt amplifies this effect by decreasing firms’ net worth on impact. In contrast, without financial frictions and balance-sheet effects, the model counter-factually implies that, following a large devaluation, exports increase immediately to their new steady-state level. We find that accounting for the observed heterogeneity in export intensity across exporters plays a key role for explaining a significant share of the gap between the data and the frictionless model.