"Dollar Financing and Trade : Evidence from Chile"

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Abstract : Dollar invoicing is prevalent in international trade, even when the United States is not involved ; however, little is known about how access to dollar liquidity impacts trade flows of non-US firms. This paper examines how dollar financing affects firms’ trading behaviors using the cross-currency basis (CCB) as a country-specific indicator of the dollar borrowing cost for firms outside the United States. Exploiting disaggregated firm-level data from Chile between 2009 and 2022, I apply a multi-dimensional fixed effect model along with two shift-share style instruments to identify the effects of dollar financing on firms’ imports and exports. Intuitively, I find that easier access to dollar liquidity increases both firm-level imports and exports. However, this effect diminishes when exporting firms trade more intensively with the United States, suggesting that they rely less on the foreign exchange (FX) market for dollar liquidity when alternative sources of funding are available. Further analysis reveals that CCB works better as a dollar liquidity indicator than the more commonly utilized broad dollar index. Lastly, I conduct an analogous exercise with Chinese data, which echoes the finding from Chile while underscoring the conditioning role of different exchange rate regimes.