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Corporate Foreign Currency Borrowing and Investment. The Case of Hungary

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  • Marianna Endrész

    ()
    (Magyar Nemzeti Bank (the central bank of Hungary))

  • Péter Harasztosi

    ()
    (Magyar Nemzeti Bank (the central bank of Hungary))

Abstract

The paper investigates the impact of foreign currency lending in the Hungarian corporate sector on real investment. Using a rich micro dataset we consider two questions. First we test whether foreign currency (FX) lending – by lowering user cost and easing liquidity constraints – contributed to larger investment before the crisis. The second question focuses on balance sheet effects – whether the large domestic currency depreciation observed during the great recession resulted in lower investment rate for firms with foreign currency loans. We try to separate and measure both the competitiveness and balance sheet effect of depreciation. In order to answer these questions several methods are employed – OLS regression, regression enhanced with interaction-terms, and matching. The uniqueness of the paper lies in its almost full coverage in terms of firms and FX exposures, and the richness of the dataset. The results show that before the crisis FX lending increased investment rates. In addition, evidence is found on the liquidity easing channel being effective, i.e. the effect was larger in the case of smaller and non-traded firms. During the crisis the investment rate of firms with FX loans declined more because of balance sheet effects triggered by the depreciation. More liquidity constrained firms suffered more. On the other hand, the evidence on the competitiveness effect is weaker and less robust. Although one would expect that the effect of the exchange rate is non-linear and heterogeneous, the more general non-parametric approach (matching) yields estimates that do not statistically differ from the simple linear regression coefficients.

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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2014/1.

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Length: 34 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:mnb:wpaper:2014/1

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Keywords: liability dollarization; currency mismatch; investment; balance sheet effects; liquidity constraints;

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  1. Kandilov, Ivan T. & Leblebicioglu, AslI, 2011. "The impact of exchange rate volatility on plant-level investment: Evidence from Colombia," Journal of Development Economics, Elsevier, vol. 94(2), pages 220-230, March.
  2. Marcio M. Janot & Márcio G. P. Garcia & Walter Novaes, 2008. "Balance Sheet Effects in Currency Crises: Evidence from Brazil," Working Papers Series 162, Central Bank of Brazil, Research Department.
  3. Miguel FUENTES, 2009. "Dollarization Of Debt Contracts: Evidence From Chilean Firms," The Developing Economies, Institute of Developing Economies, vol. 47(4), pages 458-487.
  4. Pratap, Sangeeta & Lobato, Ignacio & Somuano, Alejandro, 2003. "Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 450-471, December.
  5. Romain Ranciere & Aaron Tornell & Athanasios Vamvakidis, 2010. "Currency mismatch, systemic risk and growth in emerging Europe," Economic Policy, CEPR & CES & MSH, vol. 25, pages 597-658, October.
  6. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
  7. Mehtap Kesriyeli & Erdal Ozmen & Serkan Yigit, 2005. "Corporate Sector Debt Composition and Exchange Rate Balance Sheet Effect in Turkey," ERC Working Papers 0507, ERC - Economic Research Center, Middle East Technical University, revised Nov 2005.
  8. Simon Gilchrist & Jae W. Sim, 2007. "Investment during the Korean Financial Crisis: A Structural Econometric Analysis," NBER Working Papers 13315, National Bureau of Economic Research, Inc.
  9. Galindo, Arturo & Panizza, Ugo & Schiantarelli, Fabio, 2003. "Debt composition and balance sheet effects of currency depreciation: a summary of the micro evidence," Emerging Markets Review, Elsevier, vol. 4(4), pages 330-339, December.
  10. Galiani, Sebastian & Levy Yeyati, Eduardo & Schargrodsky, Ernesto, 2003. "Financial dollarization and debt deflation under a currency board," Emerging Markets Review, Elsevier, vol. 4(4), pages 340-367, December.
  11. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  12. Mariann Endrész & Gyõzõ Gyöngyösi & Péter Harasztosi, 2012. "Currency mismatch and the sub-prime crisis: firm-level stylised facts from Hungary," MNB Working Papers 2012/8, Magyar Nemzeti Bank (the central bank of Hungary).
  13. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 883-913.
  14. Gaston Gelos, R., 2003. "Foreign currency debt in emerging markets: firm-level evidence from Mexico," Economics Letters, Elsevier, vol. 78(3), pages 323-327, March.
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