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The authors attempt to analyze the direct impact of exchange rate volatility on the export performance of ten Central

and Eastern European transition economies, as well as its indirect impact via changes in exchange rate regimes. Not only aggregate but also bilateral and sectoral export flows are studied. To this end, the authors first analyze shifts in exchange rate volatility linked to changes in the exchange rate regimes and, second, they use these changes to construct the dummy variables that they include in their export function. The results suggest that the size and the direction of the impact of forex volatility and of regime changes on exports vary considerably across sectors and countries and that they may be related to specific periods.

the negative impact of exchange-rate volatility on exports can be rationalised through the asymmetry of adjustment costs leading to investment irreversibility. respectively in 1985 and 1987). Surprisingly. it will be very difficult. the current earnings of a firm rise. But once these investments are made. However. mitigation of exchange-rate risk is unlikely to be the main sources of the growth-enhancing effect of financial development found in the literature. adopting more or less fixed exchange-rate systems.The increasing volatility of exchange rates after the fall of the Bretton Woods agreements has been a constant source of concern for both policymakers and academics. especially the emerging economies. more recent work has emphasised that these results could be due both to an aggregation bias (Broda and Romalis 2010) and an excessive focus on richer countries with highly developed financial markets. 2009) are found for developing countries. and more generally on growth. Keeping in mind that sunk costs of exports are similar to investments in intangible capital. Developed countries fought hard in the 1980s to limit US dollar fluctuation (one thinks of the Plaza and Louvre’s agreements. This column provides support for both claims. more generally. The firm may use this additional income to fund the sunk costs of entering new markets. One can think of exchange-rate risk. thus dampening or eliminating its negative effects on trade. they will face additional difficulties to fund new . which creates uncertainty for the exporter's earnings. But this effect is not clearly established. arguing that there is indeed a negative impact of exchangerate volatility on firms’ exporting behaviour. such research and development (Berman and Héricourt 2010). and some European countries took an even more radical decision by giving up their national currency for the euro in 1999. proportionally stronger for financially vulnerable firms – and consequently weaker with high levels of financial development. to back out and recover the cost of those investments even in the case of an abrupt subsequent currency appreciation. adapting products to foreign tastes and environments. pointing to very small or insignificant effects. has been quite mixed. financial dependence and firm-level trade Several mechanisms can generate a negative impact of exchange-rate volatility on trade. magnified for financially vulnerable firms. and dampened by financial development. macroeconomic evidence of the effect of exchange-rate volatility on trade. Exchange-rate volatility. The underlying intuition is simple: exchange-rate risk increases transaction costs and reduces the gains to international trade. If firms are credit constrained. establishing a distribution system and. In that context. and most of the time impossible. The existence of well-developed financial markets should allow agents to hedge exchange-rate risk. When facing a real depreciation of its own currency. either empirically or theoretically. since much more substantial negative effects of the exchange-rate volatility on trade (Grier and Smallwood 2007) and growth (Aghion et al. and that exchange-rate movements also give rise to sunk costs (Greenaway and Kneller 2007). especially when one remembers the painful collapses of south-east Asian fixed pegs or of the Argentinian currency board at the turn of the century. In that sense. Fixed start-up costs for entering the export market include costs of gathering information on foreign markets. it seems quite puzzling to see a number of countries.

we investigate both the impact of real exchange-rate volatility on the exporting behaviour and the way financial constraints. independently of the level of financial dependence) dampens the negative impact of real-exchange-rate volatility. Tough non-negligible. we provide a . We also infer firm-level financial vulnerability from the financial dependence of their activities. It also appears that the magnitude of this exportdeterring effect depends on the extent of firms’ financial vulnerability. To illustrate these results. especially on the intensive margin of export. and the number of exported products by 0. the latter being computed as the ratio of nominal exchange rate of the yuan with respect to the partner's currency divided by the partner's price level) on different measures of intensive and extensive margins. we can compare the reduction in the export performance due to realexchange-rate volatility for strongly and weakly credit-constrained firms. Lessons from China In our recent paper (Héricourt and Poncet 2012). the same 2% increase in yearly real-exchange-rate volatility cuts the export value by 0. Our empirical estimations rely on export data for more than 100.85%. These results are directly in line with recent macroeconomic literature emphasising that financial development tends to reduce the impact of exchange-rate volatility on economic performance (see Aghion et al. for weakly constrained firms: for them. the effects appear therefore quantitatively less important for the extensive margin of trade than for the intensive margin. we identify the impact of exchange-rate volatility (defined as the yearly standard deviation of monthly log differences in the real exchange rate.24%. The effect is lower. Using this detailed information. with a range from one to ten. shape this relationship at the firm level. our results suggest that a two percentage point (i. We do find that financial development directly (that is.e. We find that that firms tend to export less and fewer products to destinations with higher exchange-rate volatility.07%. In this study. one standard deviation) increase in yearly real-exchange-rate volatility would reduce the export value by 3%. including the products and destinations they serve. we find support for this kind of mechanism using a panel of Chinese firms. together with financial development. but our results also point to an even stronger relaxation effect when sectoral financial dependence We have access to information on firms’ foreign sales as well as on the structure of their exports. this second type of effect is much stronger than the direct one. 2009). depending on the level of financial constraints. and the number of exported products by 0. Mitigating role of financial development We subsequently exploit Chinese cross-provincial heterogeneity to study how financial development (measured as the share of total credit over GDP in the province) may mitigate both credit constraints and exchange-rate volatility. Quantitatively. and will be even more reluctant to take the chance of engaging in exports to markets characterised by highly volatile exchange rates.000 Chinese exporters over the period 2000-06. Doing so. but still present. Regarding the strongly constrained firms.

494-513. NBER Chapters in “Commodity Prices and . First. Journal of Monetary Economics. Journal of Development Economics 93(2). and therefore. leading to substantial exposure to exchange-rate fluctuations. These findings in the Chinese context are especially interesting. Romain Rancière and Kenneth Rogoff (2009). Policy implications Our results emphasise that the magnitude of the negative impact of real-exchange-rate volatility depends mainly on the extent of financial constraints.  More generally. Broda Christian and John Romalis (2010). Philippe Bacchetta. the high heterogeneity in terms of both (regional) financial development and (sectoral) financial dependence enlightens that credit constraints are key in determining to what extent the exchange-rate volatility will be harmful to trade. the export rate is particularly high related to the economic size of China. 56. Better access to external finance would support the expansion of firms' exports. Finally. 206-217. “Identifying the Relationship Between Trade and Exchange Rate Volatility”. and propose a potential channel for it (through exports). particularly to those destinations characterised by real-exchange rate-related uncertainty. Berman Nicolas and Jérôme Héricourt (2010). our study emphasises that emerging countries should be careful when relaxing their exchange-rate regime. due to progressive removal of trading restrictions on the yuan. as the country is progressively giving up its relatively rigid exchange-rate system. on the level of financial development. General lessons There are a couple of lessons to draw from our research:  The development of credit markets is crucial to help firms to overcome the additional export sunk cost related to real-exchange-rate volatility. Hard fixed pegs for developing countries are certainly not always a panacea.microfounded investigation of this effect. Second. the exchange-rate volatility is expected to substantially rise in the future. References Aghion Philippe. because China appears as a typical case for analysing issues raised by exchange-rate volatility for developing countries. with a goal of having a basically convertible currency by 2015. but moving to a fully floating regime without the adequate level of financial development could also prove to be very hazardous for trade performance. “Exchange rate volatility and productivity growth: The role of financial development”. “Financial Factors and the Margins of Trade: Evidence from Cross-Country Firm-Level Data”.

“Firm heterogeneity. Blackwell Publishing. Grier Kevin B and Aaron D Smallwood (2007). East Asia Seminar on Economics 20. 117(517). CEPII Discussion Paper 2012-35. 965-979. “Exchange rate volatility. Greenaway David and Richard Kneller (2007). Economic Journal. National Bureau of Economic Research. 79-110. . exporting and foreign direct investment”. Héricourt Jérôme and Sandra Poncet (2012).Markets”. Inc. “Uncertainty and Export Performance: Evidence from 18 Countries”. financial constraints and trade: empirical evidence from Chinese firms”. December. 134-161. Journal of Money. Credit and Banking 39(4).