Dollar Exchange Rate volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data
IMF Working Papers, May 26, 2023
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- Dollar Exchange Rate volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data
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Bibliographic details
- Authors: Kodjovi M. Eklou
- Published: May 26, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400243950.001
Summary and scope
- Examines the impact of Dollar exchange rate volatility on firm productivity in Emerging Markets economies (EMs).
- Uses firm level data covering 16 EMs over the period 1998 -2019.
- Paper type: IMF Working Papers.
Main findings
- Dollar exchange rate volatility reduces firm productivity growth.
- Results are driven by countries with:
- low level of financial development,
- high dollar invoicing,
- high bilateral trade with the US,
- high collective bargaining coverage,
- open capital account.
- Foreign Exchange Interventions (FXI) dampen the negative impact of dollar exchange rate volatility on firm productivity.
- Dollar exchange rate volatility operates through the financial friction channel, reducing contemporaneous investments, especially at firms with:
- low liquidity buffers,
- weak balance sheet (high leverage).
- Younger firms, more likely to face financial constraints, are more vulnerable to dollar exchange rate volatility.
- Firms with highly irreversible investment experience a large and persistent effect, supporting the real option channel of uncertainty on the dollar exchange rate.
Robustness and identification
- Findings are robust to a battery of tests, including:
- controlling for uncertainty,
- controlling for financial crises,
- using an instrumental variable strategy exploiting US monetary policy shocks as an exogenous source of variation in dollar exchange rate volatility.
Subject areas and keywords
- Subject: Employment protection, Exchange rates, Financial markets, Financial sector development, Foreign exchange, Labor, Production, Productivity, Total factor productivity
- Keywords: Dollar exchange rate, dollar exchange rate volatility, dollar invoicing, Employment protection, exchange rate volatility, Exchange rates, Financial sector development, Firm heterogeneity and spillovers, firm Level data, Global, Investment, Productivity, Productivity growth, Total factor productivity, volatility, volatility shock com
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- Working Paper