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Balance Sheet and Currency Mismatch: Evidence for Peruvian Firms

Listed author(s):
  • Nelson R. Ramírez-Rondán

    (Central Bank of Peru)

In the Peruvian economy, as in other emerging economies, a significant portion of the debt held by firms is denominated in US dollars. While an exchange rate depreciation likely increases firm debt and influences plans of investment and production, literature finds weak or no evidence of this balance sheet effect. In this paper I argue that this effect is observed in firms with a significant currency mismatch. I estimate the currency mismatch (defined as assets minus liabilities in USD and expressed as a percentage of total assets in domestic currency) from which the exchange rate has negative effects on firms' investment. Using financial information from 74 non-financial Peruvian firms from 2002 to 2014, I find significant balance sheet effects for firms with a currency mismatch below -10.4 percent.

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Paper provided by Peruvian Economic Association in its series Working Papers with number 2016-85.

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Date of creation: Dec 2016
Handle: RePEc:apc:wpaper:2016-085
Contact details of provider: Web page: http://perueconomics.org/

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  1. Gondo, Rocio & Orrego, Fabrizio, 2011. "Dedollarization and financial robustness," Working Papers 2011-022, Banco Central de Reserva del Perú.
  2. Nicoletta Batini & Joseph Pearlman & Paul Levine, 2006. "Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets," Computing in Economics and Finance 2006 148, Society for Computational Economics.
  3. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2009. "Exchange rate and inflation dynamics in dollarized economies," Journal of Development Economics, Elsevier, vol. 89(1), pages 98-108, May.
  4. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2011. "The relationship between investment and large exchange rate depreciations in dollarized economies," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1265-1279.
  5. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
  6. Kevin Cowan & Erwin Hansen & Luis Oscar Herrera, 2005. "Currency Mismatches, Balance-Sheet Effects and Hedging in Chilean Non-Financial Corporations," Research Department Publications 4387, Inter-American Development Bank, Research Department.
  7. Carranza, Luis J. & Cayo, Juan M. & Galdon-Sanchez, Jose E., 2003. "Exchange rate volatility and economic performance in Peru: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 472-496, December.
  8. César Carrera, 2016. "Identifying the exchange-rate balance sheet effect over firms," Working Papers 2016-66, Peruvian Economic Association.
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