Exporting strategies of heterogeneous firms subject to export shocks and financial restraints

This paper develops an open economy firm-heterogeneous model where the combination of market rigidities and exchange rate uncertainty acts like a barrier to trade and modifies a firm's optimal choice in terms of production and pricing. The existence of price and labour rigidities, coupled with imperfect financial development and exchange rate uncertainty, separates incumbent firms into (1) domestic producers, (2) exporters setting the price in national currency and (3) more productive exporters pricing in foreign currency. The model predicts that only where financial development is limited a reduction in exchange rate uncertainty raises a firm's profit, lowers prices, and induces new firms to export. Fully financially integrated countries are insulated from exchange rate risk.


Publication infos:
Geneva, The Graduate Institute of International and Development Studies, 2008
Publication year:
2008
Number of pages:
23 p.
Collection:
HEID Working Paper ; 10/2008



 Record created 2011-08-08, last modified 2019-09-30

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