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Foreign currency borrowing, balance sheet shocks and real outcomes

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  • Bryan Hardy

Abstract

Emerging market firms frequently borrow in foreign currency (FX), but their assets are often denominated in domestic currency. This behavior leads to an FX mismatch on firms balance sheets, which can harm their net worth in the event of a depreciation. I use a large, unanticipated, and exogenous depreciation episode and a unique dataset to identify the real and financial effects of firm balance sheet shocks. I construct a new dataset of all listed non-financial firms, matched to their banks, in Mexico over 2008q1-2015q2. This dataset combines firm-level balance sheets and real outcomes, currency composition of both assets and liabilities, and firms' loan-level borrowing from banks in peso and FX. This data allows me to control for shocks to firms' credit supply to identify the balance sheet shock and examine its real consequences. I find that non-exporting firms that have a larger FX mismatch experience greater negative balance sheet effects following the depreciation. Among these, smaller firms see a decrease in loan growth, resulting in stagnant employment growth and decreased growth in physical capital relative to firms with smaller FX mismatch. Larger firms with a large FX mismatch also have lower growth in FX loans following the shock, but are able to increase borrowing in peso loans, resulting in relatively higher growth in employment and physical capital. My results imply that firms are subject to net worth based borrowing constraints, and that these constraints are more binding on smaller firms and for loans in FX.

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  • Bryan Hardy, 2018. "Foreign currency borrowing, balance sheet shocks and real outcomes," BIS Working Papers 758, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:758
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    Cited by:

    1. Jorge Fernández B. & Fernando Pino M. & Francisco Vásquez L., 2020. "Corporate-Sector Functional Currency: An International Comparison," Working Papers Central Bank of Chile 882, Central Bank of Chile.
    2. Camila Casas & Sergii Meleshchuk & Yannick Timmer, 2020. "The Dominant Currency Financing Channel of External Adjustment," Borradores de Economia 1111, Banco de la Republica de Colombia.
    3. Bryan Hardy & Felipe Saffie, 2019. "From carry trades to trade credit: financial intermediation by non-financial corporations," BIS Working Papers 773, Bank for International Settlements.

    More about this item

    Keywords

    balance sheet shocks; credit rationing; currency risk; foreign currency; corporate finance; bank lending; investment;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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