۱- Introduction

۲- Model

۳- Mechanism

۴- Quantitative analysis

۵- Financial frictions, balance-sheet effects, and reallocation

۶- Conclusion

References

Abstract

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 endogenous export decisions in which firms face financing constraints and debt can be denominated in foreign units. Despite the negative impact of these channels on capital accumulation and output at the firm-level, we find that they only explain a modest fraction of the gradual increase of exports observed in these episodes. Exports increase since financially-constrained exporters are able to reallocate sales across markets. We show analytically the role of this mechanism on exports adjustment and document its importance using plant-level data.

Introduction

Understanding the response of exports to aggregate shocks is key for determining the role of trade in driving the recovery from economic downturns. While a large class of open economy models imply that large devaluations are associated with a sharp contemporaneous increase of aggregate exports, Alessandria et al. (2015) and others show that aggregate exports increase gradually after large devaluations. Fig. 1 illustrates this observation for a sample of large devaluations over the period 1980 to 2013. A potential explanation for the slow response of exports in large devaluations are balance sheet effects due to the prevalence of foreign-denominated debt in emerging economies. Given limited access to finance in these economies, large devaluations increase the domestic value of firms’ debt burden, weakening their balance sheets and leading them to decrease investment and output. Moreover, recent studies also document the importance of these channels for the decisions of exporters at the firm-level.