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Why is dollar debt Cheaper? Evidence from Peru

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  • Gutierrez, Bryan
  • Ivashina, Victoria
  • Salomao, Juliana

Abstract

In emerging markets, a significant share of corporate loans are denominated in dollars. Using novel data that includes loan-level currency and the cost of credit, in addition to several other transaction-level characteristics, we re-examine the reasons behind dollar credit popularity. We find that a dollar-denominated loan has an interest rate that is 2 percentage points lower per year than a loan in local currency. Expectations of exchange rate movements do not explain this difference. We show that this interest rate differential for lending rates is closely matched by the differential in the deposit market. Our results suggest that the preference for dollar loans is rooted in the local depositors preference for dollar savings, and a banking sector that is strongly incentivized to closely match its foreign-currency assets and liabilities. Cross-borrower variation points to competitive pressure among banks to explain the significant pass-through of this differential.

Suggested Citation

  • Gutierrez, Bryan & Ivashina, Victoria & Salomao, Juliana, 2023. "Why is dollar debt Cheaper? Evidence from Peru," Journal of Financial Economics, Elsevier, vol. 148(3), pages 245-272.
    • Handle: RePEc:eee:jfinec:v:148:y:2023:i:3:p:245-272
    DOI: 10.1016/j.jfineco.2023.04.003
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    2. Georgios Georgiadis & Gernot J. Müller & Ben Schumann, 2023. "Dollar Trinity and the Global Financial Cycle," Discussion Papers of DIW Berlin 2058, DIW Berlin, German Institute for Economic Research.

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    More about this item

    Keywords

    Dollar loans; UIP; Bank regulatio;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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