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Exchange rate, foreign currency debt and firm-level investment

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  • Du, Qingyuan
  • Hong, Shengjie
  • Wang, Yao
  • Wang, Yaqi

Abstract

In this paper, we investigate the effect of exchange rate volatility on firm-level investment, highlighting the role of the financial channel for firms that borrow in foreign currencies. Using Chinese firm-level data (2000–2021), we find that an increase in exchange rate volatility significantly reduces investment for firms with foreign currency debt. The results suggest that exchange rate volatility has a more pronounced effect on firm investment through the financial channel, compared with the trade channel commonly discussed in the literature. Our investigation into debt structure reveals that the impact of exchange rate volatility due to long-term foreign currency debt exposure and the US dollar exchange rate volatility exposure is particularly pronounced among Chinese firms. Moreover, our analyses identify the real option, precautionary savings and cross-industry spillover mechanisms as key factors determining the impact of exchange rate volatility on Chinese firm investment.

Suggested Citation

  • Du, Qingyuan & Hong, Shengjie & Wang, Yao & Wang, Yaqi, 2026. "Exchange rate, foreign currency debt and firm-level investment," Journal of International Money and Finance, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:jimfin:v:161:y:2026:i:c:s0261560625002104
    DOI: 10.1016/j.jimonfin.2025.103475
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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