Monetary Policy, Financial Constraints and International Trade – TRAMOFIN

Research performed in the project are based on state-of-the art micro-founded models and French and Chinese firm-level (most of the time exhaustive) data. These data are used in the first line of the project in order to assess the impact of exchange rate volatility or demand shocks on international trade, both at the firm (i.e., on the export decision and the exported value) and the aggregate level. Effects on the different trade margins are detailed, as well as their heterogeneity along firms’ characteristics. The second line builds on the most recent theoretical approaches in order to assess the impact of various public policies (monetary and fiscal policy, product market regulation) on the entry of new firms or new products on a given market. The third line asks whether the cyclical properties of aggregate leverage are actually the reflection of decisions made by a few large firms, before focusing on firms’ heterogeneity in size and risk they face.

Results show that both value exported and decision to enter the export market at the firm-level are significantly reduced when destination countries display a higher exchange rate volatility. Besides, volatility distorts the allocation behavior between different destinations: firms’ reallocate exports toward destinations with a smaller relative volatility, and do even more so when they serve a lot of destinations. We also show that an exogenous increase in exports triggers a simultaneous increase in domestic sales. Note also that credit constraints at the firm-level explain a significant part of the abovementioned results. On the theoretical ground, the models developed show that a positive monetary policy shock triggers net firms entries, and that a product market deregulation also improve trade extensive margin. A cut in labor taxation improves price competitiveness, but decreases competitiveness at the extensive margin.

The project provides several prospects for future research, especially regarding the third line of research. Among them, the study of the cyclical properties of the aggregate leverage ratio (defined as the ratio of corporate debt over equity) is one of the most promising one. The empirical literature does not provide clear stylized facts either on the cyclical behavior of aggregate leverage, or on any of its two components (corporate financial debt and equity). Beyond providing some clear stylized facts on that issue, what is at stake here is to understand through which channels firms react to macroeconomic shcoks and the drivers of the imbrication between financial sphere and macroeconomic dynamics.
Regarding the 2nd line of research, the study of the Canadian case, not initially planned in the project, could also prove to be quite interesting. Canada is an interesting case study for several reasons. Firstly, the country is exposed to a double volatility, on commodities prices and US dollar, the invoice currency of the major part of the considered products - rouhgly, 75% of Canadian exports are directed towards the USA. Besides, Canada displays an interesting specificity: a low labor productivity compared to other inudstrialized countries. Several interesting issues are in order here: is the high exposition to several sources of volatility partly responsible for the weak productivity of Canadian firms? Is there a currency mismatch at work here? Does he regional (provincial) business cycle play a part?

Three papers produced in the project where published in top rank journals: Journal of Monetary Economics, Journal of International Economics, The World Bank Economic Review. In addition, another paper is currently circulating as a CEPII working paper (#2015-03), and another one is a mimeo close to completion.

Besides, two VOX-EU (www.voxeu.org) columns and two CEPII (www.cepii.fr) blog columns have been produced based on these papers.

Our project aims at exploring the two-way interactions between aggregate fluctuations and firm-level behavior. In other terms, we plan to assess how macroeconomic shocks and especially monetary policy shocks affect firm-level behavior on the one hand, and how microeconomic (firm-level) decisions may impact aggregate fluctuations on the other hand. In doing so, our project contributes to the recent vivid literature that underlines the relevance of bridging the gap between international trade and open macroeconomics. More specifically, the project revolves around three distinct but related scientific axis of research.

The first axis consists in several empirical exercises. We propose to use firm-level monthly data for France and China to provide new insights on the impact of macroeconomic fluctuations on trade at the firm-level, with a special emphasis on the Great Recession of 2008-2009. What we have in mind is to compare the effect of a supposedly exceptional shock with standard shocks, in order to check if 1) the intensive margin is effectively the most affected (cf. Haddad et al., 2010) and 2) above a certain degree of intensity, the shock influences the extensive margin through the entry/exit behavior. Following Berman et al. (2009), we will also analyze how the reaction of exporters to exchange rate changes varies with the size of the exporter.

The second axis will deal first with the link between monetary policy and endogenous firm entry. It will depart from previous literature by adopting an open-economy perspective to study the interaction between monetary policy, aggregate volatility and the extensive margin of international trade using a Dynamic Stochastic General Equilibrium (DSGE) modeling. Second, we extend our investigation to study the role of financial constraints. We will subsequently amend our two-country open-economy DSGE model to include credit constraints at the firm-level. This framework will then enable us to perform cross-country firm-level estimations of the impact of financial constraints on the exporting behavior, using the Amadeus database. In a further analysis, we propose to study the interaction between credit constraints and the leverage ratio, by asking whether the cyclical properties of aggregate leverage are actually the reflection of decisions made by a few large firms. This will be done both at the theoretical and empirical level.

Building on and extending the second axis, the third one will integrate in the analysis the importance of firm or sector-level shocks for aggregate fluctuations. More, precisely, we ambition to develop a two-country DSGE granular economy, ie featured with heterogeneous firms in size and in the risk they face. We hope to improve the calibration of the DSGE model upon the existing literature and to relate the implications of firms’ idiosyncratic risk to monetary policy. Our ambition is therefore to “close the loop” by assessing the link between idiosyncratic shocks, aggregate volatility and monetary policy in the context of open granular economies.