IMF Working Papers

Dollar Exchange Rate volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data

By Kodjovi M. Eklou

May 26, 2023

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Kodjovi M. Eklou Dollar Exchange Rate volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data, (USA: International Monetary Fund, 2023) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the impact of Dollar exchange rate volatility on firm productivity in Emerging Markets economies (EMs). Using firm level data covering 16 EMs over the period 1998 -2019, the paper shows that dollar exchange rate volatility reduces firm productivity growth. Exploring channels, its finds that the results are driven by countries with low level of financial development, high dollar invoicing, high bilateral trade with the US, high collective bargaining coverage and open capital account. Exploring the role of policy, it finds that Foreign Exchange Interventions (FXI) dampen this impact on firm productivty. Further, exploiting firm level data, the paper shows that dollar exchange rate volatility operates also through the financial friction channel, reducing contemporaneous investments, especially at firms with low liquidity buffers and weak balance sheet (high leverage). The role of financial frictions is confirmed through the finding that younger firms, more likely to face financial constraints, are also found to be more vulnerable to dollar exchange rate volatility. In addition, we also find evidence of a large and persistent effect on firms with highly irreversible investment, lending support for the real option channel of uncertainty on the dollar exchange rate. These findings are robust to a battery of tests, including controlling for uncertainty, financial crises and using an instrumental variable strategy exploiting US monetary policy shocks as an exogenous source of variation in dollar exchange rate volatility.

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

Publication Details

  • Pages:

    45

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/111

  • Stock No:

    WPIEA2023111

  • ISBN:

    9798400243950

  • ISSN:

    1018-5941