Transmission of real exchange rate to the manufacturing sector: Role of financial access

Description

We examine the impact of real exchange rate movements on the performance of Indian manufacturing firms over the period 2000–2012. Our empirical analysis shows that changes in the real exchange rate significantly affect firm performance, although the magnitude and direction of this impact vary across firm- and industry-level characteristics. In particular, the effects depend on factors such as market power, trade orientation, foreign ownership, access to domestic finance, and industry concentration. Furthermore, currency appreciation and depreciation have asymmetric impacts on firm performance. Results from a panel vector autoregression (Panel-VAR) model support these findings. Overall, the study highlights the importance of accounting for firm- and industry-level heterogeneity when designing policies to manage exchange rate shocks. It also underscores the role of financial development in enhancing firms’ ability to manage currency risk effectively.

Publication Date

1-1-2015

Keywords

Real exchange rate, Manufacturing performance, Mark up

Conference

17-20 May, 2015, IT&FA, Sarsota

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