This paper studies the role of financial frictions in explaining the heterogeneous effect of exchange rate uncertainty on international trade. Empirically, exports in industries in which firms have less tangible capital or rely more heavily on external finance decrease more in times of high uncertainty. However, the marginal effect of financial constraints depends on the relative size of exporters within a sector. A heterogeneous-firm model of financially-constrained exporters rationalizes the empirical findings even in the absence of risk aversion. In the model, exchange rate uncertainty affects firms by increasing the interest rates they need to pay. Lenders are concerned with the exchange rate because it affects the exporting firms' revenues and their ability to repay their loans. The calibrated model shows that providing additional collateral to financially-constrained firms lessens the reduction in exports due to uncertainty, but has limited effects.
Uncovered Interest Rate Parity Models in a General Equilibrium Framework (in progress)
The uncovered interest parity puzzle is the empirical finding that countries with higher risk-free interest rates tend to see their currencies appreciate in the short run. Typical two-country macroeconomic models instead predict that high interest-rate currencies depreciate, with arbitrage opportunities eliminating profitable carry trade strategies. The international finance literature responded to this puzzle by providing several alternative theoretical models able to explain the puzzle. This paper studies how the predictions of two of these alternative models - the habit model of Verdelhan (2010) and the distorted belief model of Gourinchas and Tornell (2004) - are affected when re-cast in a standard dynamic stochastic general equilibrium framework.