Trade Credit and Exchange Rate Risk Pass Through / Bryan Hardy, Felipe E. Saffie, Ina Simonovska.

Format:

Book

Author/Creator:

Hardy, Bryan.

Contributor:

National Bureau of Economic Research.

Saffie, Felipe E.

Simonovska, Ina.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31078.

NBER working paper series no. w31078

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

We show that trade credit mitigates exchange rate risk pass through along supply chains. We develop a theory of trade credit provision along supply chains that involve large intermediate-good suppliers and small final-good producers, both of which face bank borrowing constraints. Motivated by empirical findings, we assume that large suppliers borrow in foreign currency, while small final-good producers borrow in domestic currency at higher rates. Trade credit loosens borrowing constraints and allows for higher production scale. Additionally, the model predicts that unconstrained suppliers fully absorb increasing costs of borrowing in foreign currency when domestic currency depreciates: specifically, suppliers settle for lower profits but maintain unchanged trade credit lines with their trade partners. We verify the model's predictions using firm-level data for over 11,000 large firms in 19 emerging markets over the 2004-2020 period.

Notes:

Print version record

March 2023.