The Valuation Effects of Trade
Nominal exchange rates are highly volatile compared with other macroeconomic and international shocks. These exchange rate movements have large real effects when emerging-market firms make financial decisions that generate currency mismatches on their balance sheets. Yet currency mismatches generated by operational activities priced in foreign currencies, or “invoice mismatches,” remain insufficiently studied. This paper studies the real effects of invoice mismatches. It is the first empirical paper that tracks the path of a euro depreciation shock from its effect on product value at the border, to its impact on firm-level aggregate cash flows, all the way to its macroeconomic investment and employment effects. Specifically, the paper estimates the exchange rate pass-through on prices, volume, and value of trade conditional on different product pricing regimes, and then relates such pass-through to investment and employment decisions of French exporters and importers.