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.
Key Findings
- The value of transactions invoiced in foreign currencies is twice as sensitive to exchange rates as the value of transactions invoiced in euros. After a 1 percent yearly depreciation of the euro, foreign-priced sales values increase 0.6 to 0.8 percent from the point of view of French exporters. Foreign-priced nominal imports increase by the same amount. Values of euro-priced exports and import rise 0.3 percent.
- Regarding the effect of currency fluctuations on the income that companies potentially gain at the border from their unhedged dominant-priced operations—those involving trade priced in dollars when the partner country is not the United States—cash flows increase, on average, 45 cents for every euro of invoice valuation. Salaries increase 12 cents, and tangible investment increases 3 cents for every euro of invoice valuation.
- Regarding the effects of invoice valuations on “domestic-oriented” firms— manufacturing and wholesale companies that import from outside the European Union and sell mostly to the domestic market in euros—these firms have an invoice valuation pass-through into cash flows of 40 to 45 cents on the euro. A one-standard-deviation shock of invoice valuation explains as much as 5 percent of their cash flow standard deviation.
- There is no significant pass-through of invoice valuations into investment or employment for all large firms. Only small domestic-oriented firms have significant invoice valuation pass-through into investment and payroll of 7 and 12 cents on the euro, respectively.
- Invoice valuations affect aggregate investment and employment, but the effects are negligible because large firms in the economy operationally hedge their invoice exposures, and they can better deal with shocks to their liquidity. A 10 percent euro depreciation causes a 0.1 percent increase in aggregate investment and a 0.2 percent increase in the aggregate payroll of all trading firms.
Implications
While previous studies find that dollar-priced trade responds little, in dollar terms, to depreciations, this paper finds that nominal invoice valuation effects can have investment and employment consequences for illiquid firms.
By studying currency mismatch effects arising from foreign-currency pricing of trading activities, as opposed to mismatches arising from financial positions, this paper also finds that trade values and cash flows of dollar-pricing-exposed firms are highly sensitive to euro-dollar exchange rate fluctuations, regardless of the size or market orientation of the firms.
In addition, this paper uses a novel invoice-weighted exchange rate index that outperforms any trade-weighted index in explaining cash flows, investments, and employment outcomes for trading firms. The index enables the comparison of an invoice valuation effect observed at the border directly with an invoice valuation effect observed in firms’ balance sheets.
Furthermore, this paper reconciles the observed large sensitivities of gross trade flows to exchange rates with the standard evidence of “disconnect” between exchange rates and real macroeconomic variables. If finds that in France, large nominal fluctuations do not impact real aggregate variables because exposed firms are liquid and hedge their dollar-priced exports with dollar-priced imports. Invoice valuations at the border are large, but most of the time they are absorbed within the balance sheets of firms directly buying and selling merchandise at the border.
Abstract
This paper estimates the cash flow and real effects of currency mismatches generated by foreign-priced operations of French manufacturers. The value of transactions invoiced in foreign currencies is twice as sensitive to exchange rates as the value of transactions invoiced in the domestic currency. I aggregate foreign-priced operations to the firm level to build a shift-share measure of invoice currency mismatch. This measure outperforms any trade-weighted effective exchange rate index in explaining cash flows of trading firms. Large firms absorb valuation shocks in their balance sheet, and small exporters partially hedge their dollar-priced exports with dollar-priced imports. Only investment and payroll of small domestic-oriented firms are sensitive to invoice currency valuations. These results show how trade value sensitivities to currency fluctuations can coexist with the evidence of disconnect between exchange rates and real macroeconomic fundamentals.