Exchange Rate Uncertainty and Firm Profitability

Boston College Chestnut Hill, Massachusetts, USA; Mustafa Caglayan; University of Liverpool Liverpool, United Kingdom; John T. Barkoulas; Louisiana Tech University Ruston, Louisiana, USA
Journal of Macroeconomics 02/2001; 23(4):565-576. DOI: 10.1016/S0164-0704(01)00178-1
Source: RePEc

ABSTRACT This paper investigates the effects of permanent and transitory components of the exchange rate onf firms' profitability under imperfect information. Utilizing a signal extraction framework, we show that the variances of these components of the exchange rate process will have indeterminate effects on the firm's growth rate of profits, but will have predictable effects on its volatility. An increase in the variance of the permanent (transitory) component in the exchange rate process leads to greater (lesser) variability in the growth rate of the firm's profits, thus establishing that the source of exchange rate volatility matters in analyzing its effects. Implications of our theoretical findings for the empirical modeling of the underlying relationships are discussed.

  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: Employing a unique panel of 691 private firms that accounted for 26% of total value-added in manufacturing in Turkey, the paper explores the impacts of exchange rate volatility on employment growth during the period of 1983 - 2005. The empirical analysis using a variety of specifications, estimation techniques, and robustness tests suggests that exchange rate volatility has a statistically and economically significant employment growth reducing effect on manufacturing firms. Using point estimates, the results suggest that for an average firm a one standard deviation increase in real exchange rate volatility reduces employment growth in the range of 1.4 - 2.1 percentage points.
    University Library of Munich, Germany, MPRA Paper. 01/2010;
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This study offers Organization of Petroleum Exporting Countries (OPEC) member nations a crude oil pricing currency basket based on currency liquidity, in contrast with prior emphasis on OPEC trading patterns. Motivating the search for an alternative US dollar pricing of crude oil is the significant and inverse relationship (r=-0.82, p<0.01) between the US dollar major currencies index and crude oil price over the period January 1999-March 2009. A dynamically weighted petro-dollar currency basket is proposed based on the five currency claims (US dollar, Euro, British pound, Japanese yen and Swiss franc) and their varying proportions of foreign exchange reserves held by central banks. The major currencies US dollar index is compared against the proposed petro-dollar index to reveal an average US$8.1 billion annual gain in favor of the petro-dollar currency basket, offering OPEC members a revenue stream of diversified and highly liquid currencies to transition away from complete dependence on the US dollar crude oil pricing. The proposed petro-dollar crude oil pricing schema offers OPEC a crude oil price dynamically denominated in currencies reflecting the global use and importance of crude oil. This paper concludes with implementation issues facing a move toward the dynamically weighted petro-dollar crude oil pricing schema.
    Energy Policy. 01/2010; 38(4):1938-1945.
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: How important is the effect of exchange rate fluctuations on the competitive environment faced by domestic firms and the prices they charge? To answer this question, this paper examines the 17% appreciation of the yuan against the US dollar from 2005 to 2008. In a monthly panel covering 110 sectors, a 1% appreciation of the Yuan increases US import prices by roughly 0.8%. It is then shown that import prices, in turn, pass through into producer prices at an average rate of roughly 0.7, implying that a 1% Yuan appreciation increases the average US producer price of tradable goods by 0.8%*0.7=0.56%. In contrast, exchange rate movements of other trade partners have much smaller effects on import prices and hardly any effect on producer prices. The paper next demonstrates that the pass through response into import prices is heterogeneous across sectors with different characteristics such as traded-input intensity or the shape of demand for the sector's goods. In contrast, the rate at which import prices pass through into domestic producer prices is found to be homogenous across the sectors. Finally, the insights of the analysis are employed to simulate the inflationary effect of a Yuan revaluation. For example, the relative price shock caused by a 25% appreciation of the Yuan spread evenly over 10 months is equivalent to a temporary increase of the US PPI inflation rate by over five percentage points. Because such an appreciation would also influence the overall skewness of the distribution of price changes at the sectoral level, it would likely also impact U.S. equilibrium inflation.

Full-text (2 Sources)

Available from
May 21, 2014