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How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America

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  • Herman Kamil
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    Abstract

    Using a unique dataset with information on the currency composition of firms'' assets and liabilities in six Latin-American countries, I investigate how the choice of exchange rate regime affects firms'' foreign currency borrowing decisions and the associated currency mismatches in their balance sheets. I find that after countries switch from pegged to floating exchange rate regimes, firms reduce their levels of foreign currency exposures, in two ways. First, they reduce the share of debt contracted in foreign currency. Second, firms match more systematically their foreign currency liabilities with assets denominated in foreign currency and export revenues--effectively reducing their vulnerability to exchange rate shocks. More broadly, the study provides novel evidence on the impact of exchange rate regimes on the level of un-hedged foreign currency debt in the corporate sector and thus on aggregate financial stability.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/69.

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    Length: 54
    Date of creation: 01 Mar 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/69

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    Related research

    Keywords: Dollarization; Exchange rate regimes; Corporate sector; Economic models; External borrowing; Financial risk; Latin America; exchange rate; exchange rate regime; exporter; flexible exchange rate; balance sheets; currency risk; flexible exchange rate regimes; exchange rate flexibility; floating exchange rate; export revenues; financial crises; floating exchange rate regimes; exchange rate risk; exchange rates; exchange rate movements; exchange rate policy; export data; exchange rate fluctuations; foreign exchange; exchange rate volatility; market exchange rates; international markets; currency depreciation; exchange rate stability; export intensity; export status; fixed exchange rate; nominal exchange rate; flexible exchange rate regime; real exchange rate; floating exchange rates; export sales; export orientation; exchange rate policies; exchange rate appreciation; share of exports; fixed exchange rate regimes; export earnings; exchange rate shocks; exchange rate depreciations; exchange rate changes; export income; flexible exchange rate policy; real exchange rate movements; firm-level exports; exchange rate exposure; exchange rate arrangements; exporters; effective exchange rate; exchange rate band; real exchange rates; exchange rate guarantee; capital flight; floating exchange rate regime; real exchange rate volatility; average exchange rate; foreign investment; foreign exchange rate; export shares; fixed exchange rate regime; exchange rate pegs; export values; exchange rate paths; exchange rate devaluations; export receivables; implicit exchange rate guarantee; capital flows; exporter firms; exchange rate float; exporting firms; preferential exchange rate; export ratio;

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    1. Rossi Jr, José Luiz, 2009. "Corporate financial policies and the exchange rate regime: Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 10(4), pages 279-295, December.
    2. Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
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    6. Kalemli-Ozcan, Sebnem & Kamil, Herman & Villegas-Sanchez, Carolina, 2011. "What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?," CEPR Discussion Papers 8543, C.E.P.R. Discussion Papers.
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    15. McKinnon, Ronald I & Pill, Huw, 1999. "Exchange-Rate Regimes for Emerging Markets: Moral Hazard and International Overborrowing," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 19-38, Autumn.
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    18. Sengupta, Rajeswari, 2010. "Does reserve accumulation lead to higher currency-risk taking in the corporate sector? Firm-level evidence for Latin America," MPRA Paper 38888, University Library of Munich, Germany.
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    Cited by:
    1. Ijaz Hussain, 2013. "Estimating Firms’ Vulnerability to Short-Term Financing Shocks: The Case of Foreign Exchange Companies in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 147-163, July-Dec.

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