Financial frictions and exports dynamics in large devaluations

Abstract

We study the role of nancial frictions and balance-sheet e ects in accounting for the dy- namics of aggregate exports in large devaluations. In standard models of international trade, exports increase immediately following a large devaluation; in contrast, aggregate exports re- spond sluggishly in the data. We investigate a small open economy with heterogeneous rms and idiosyncratic productivity shocks, where rms face nancing constraints and debt can be denominated in domestic or foreign units. In our model, a real depreciation a ects rms through two channels. On the one hand, it increases the returns to selling internationally, making exporting more pro table. On the other hand, it tightens the borrowing constraint by increasing the value of foreign debt relative to rms' 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 nd that nancial frictions slow down the response of aggregate exports, and foreign-denominated debt ampli es this efect by decreasing rms' net worth on impact. When accounting for the observed heterogeneity in export intensity across exporters, these channels explain a large share of the gap between the data and the frictionless model.