Exchange Rate Uncertainty and Firm Profitability

Christopher F. Baum, Mustafa Caglayan, John T. Barkoulas

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

Abstract

This paper investigates the effects of permanent and transitory components of the exchange rate on firms' profitability under imperfect information. Utilizing a signal extraction framework, we show that the variances of these components of the exchange rate process will have indeterminate effects on the firm's growth rate of profits, but will have predictable effects on its volatility. An increase in the variance of the permanent (transitory) component in the exchange rate process leads to greater (lesser) variability in the growth rate of the firm's profits, thus establishing that the source of exchange rate volatility matters in analyzing its effects. Implications of our theoretical findings for the empirical modeling of the underlying relationships are discussed.

Original languageAmerican English
Pages (from-to)565-576
Number of pages12
JournalJournal of Macroeconomics
Volume23
Issue number4
DOIs
StatePublished - 2001

Keywords

  • Exchange rate
  • Firm profitability
  • Uncertainty

DC Disciplines

  • Finance

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