Financial Market Imperfections and the Impact of Exchange Rate Movements on Exports

Preliminary version, comments welcome This paper studies the role of financial market imperfections in the way countries’ exports react to a currency depreciation. Using quarterly data for 27 developed and de-veloping countries over the period 1990-2005, we show that the impact of the depreciation will be less positive- or even negative- for a country if: (i) firms borrow in the foreign currency; (ii) they are credit constrained; (iii) they are specialized in industries that require more external capital; (iv) the depreciation’s or devaluation’s magnitude is large. This last result confirms the existence of a non-linear relationship between an exchange rate depreciation and a country’s exports reaction. This work offers a new explanation for the consequences of recent currency crises in middle income countries