Abstract
This paper analyses the exchange rate response of credit-constrained exporters and highlights location-driven balance sheet effects residing both on the real side and on the financial side of the economy. A model focusing the location of production relative to both credit markets and to the first and the second hand market for capital inputs introduces a number of balance-sheet driven exchange rate effects. When it comes to location, we consider four regimes, referred to as a developed, a developing and two transition economies that differ with respect to production technology and credit market structure, respectively. The export supply response differs both across countries at different stages of development as well as between countries with different strategies to globalisation.
Highlights
The response of exports to changes in the nominal exchange rate is notoriously weak [1]
A model focusing the location of production relative to both credit markets and to the first and the second hand market for capital inputs introduces a number of balance-sheet driven exchange rate effects
As the sources of funding are located at home while the second hand market is abroad is the condition for a positive export supply influenced by the present value of collateral, which here is represented by the expected future exchange rate
Summary
The response of exports to changes in the nominal exchange rate is notoriously weak [1]. In a developing economy the credit-constrained exporter finds both credit and capital inputs abroad This introduces a cost channel, a collateral channel, a wealth channel and a funding channel for how the exchange rate impacts export supply. International first- and second hand markets for capital inputs brings exchange rate effects into the flow-of-funds constraint through both the cost- and the collateral channel as in the case of a developing economy. The interaction between the balance-sheet effects that accompany the various combinations of the location of production relative to the location of the credit market and the first- and the second-hand market for capital inputs creates a context specific export supply response that differ both between countries at different stages of development and across transition economies with different strategies to globalisation.
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