Author(s):
Bryan Hardy, Felipe Saffie & Ina Simonovska
Date:
8 October 2024
Abstract:
Large firms borrow in foreign currency and are net providers of trade credit to firms in their supply chains. We model the transmission of exchange rate risk via firm balance sheets along the supply chain. Trade credit loosens borrowing constraints and allows for higher production. Furthermore, firms are more likely to pass-through exchange rate shocks to their balance sheets onto their partners the more they are financially constrained. We validate these predictions using a quarterly firm panel for 19 emerging markets. Trade credit constitutes an important transmission mechanism of exchange rate shocks, but firms tend to protect their trading partners.
Link:
BIS Working paper No. 1216 – Trade credit and exchange rate risk pass through