Dollar Liquidity, Trade Invoicing And Real Effects: Evidence From India
Author(s) Apoorva Javadekar, Shekhar Tomar and Gautham Udupa


We provide causal evidence on the linkage between dollar liquidity and dollar invoicing exploiting an unanticipated shock to the dollar financing around the Taper Tantrum. Using the differential funding shock across countries, we test the impact of dollar liquidity on in-voicing and imports by Indian firms using transaction-level data. We find that (i) firm-level dollar invoicing drops in response to dollar funding shock with corresponding rise in Euro and producer currency pricing, (ii) local presence of foreign banks allows Indian  firms to smooth-out the liquidity shock, and (iii)  firms transfer liquidity from one market to another using their internal capital markets to smooth-out country specific funding shocks. We document that firms unable to maintain the level of dollar invoicing are more likely to lose a trade connection. 

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