Working Paper: NBER ID: w31078
Authors: Bryan Hardy; Felipe E. Saffie; Ina Simonovska
Abstract: We show that trade credit mitigates exchange rate risk pass through along supply chains. We develop a theory of trade credit provision along supply chains that involve large intermediate-good suppliers and small final-good producers, both of which face bank borrowing constraints. Motivated by empirical findings, we assume that large suppliers borrow in foreign currency, while small final-good producers borrow in domestic currency at higher rates. Trade credit loosens borrowing constraints and allows for higher production scale. Additionally, the model predicts that unconstrained suppliers fully absorb increasing costs of borrowing in foreign currency when domestic currency depreciates: specifically, suppliers settle for lower profits but maintain unchanged trade credit lines with their trade partners. We verify the model's predictions using firm-level data for over 11,000 large firms in 19 emerging markets over the 2004-2020 period.
Keywords: Trade Credit; Exchange Rate Risk; Supply Chains; Emerging Markets
JEL Codes: E30; F2; F3; F4; G15; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade credit (F19) | reduced exchange rate risk exposure (F31) |
| large suppliers absorbing costs of currency depreciation (F31) | maintaining trade credit lines (F34) |
| larger and less financially constrained firms (L25) | extending trade credit (F34) |
| higher foreign currency debt exposure (F65) | adjusting leverage and investment (G11) |
| trade credit (F19) | stabilizing mechanism in emerging markets (F32) |