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Exchange Rate Exposure and Firm Dynamics

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  • Salomao, Juliana
  • Varela, Liliana

Abstract

This paper develops a heterogeneous firm-dynamics model with endogenous currency debt composition to jointly study financing and investment decisions in developing economies. In our model, firms' foreign currency borrowing arises from a trade-off between exposure to currency risk and growth. We assess econometrically the pattern of foreign currency borrowing using firm-level census data on Hungary, calibrate the model and quantify its aggregate impact. Our counterfactual exercises show that foreign currency borrowing can lead to higher growth and that the efficiency of the banking sector to screen productive and capital-scarce firms is essential to reap up the benefits of this financing.

Suggested Citation

  • Salomao, Juliana & Varela, Liliana, 2018. "Exchange Rate Exposure and Firm Dynamics," CEPR Discussion Papers 12654, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12654
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Alfaro, Laura & Cuñat, Alejandro & Fadinger, Harald & Liu, Yanping, 2018. "The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis," CEPR Discussion Papers 12943, C.E.P.R. Discussion Papers.
    2. Maggiori, Matteo & Neiman, Brent & Schreger, Jesse, 2018. "International Currencies and Capital Allocation," CEPR Discussion Papers 12973, C.E.P.R. Discussion Papers.
    3. Laura Alfaro & Alejandro Cuñat & Harald Fadinger & Yanping Liu, 2017. "The Real Exchange Rate, Innovation and Asymmetries and Hysteresis," Harvard Business School Working Papers 18-044, Harvard Business School, revised May 2018.
    4. Cesa-Bianchi, Ambrogio & Ferrero, Andrea & Rebucci, Alessandro, 2018. "International credit supply shocks," Journal of International Economics, Elsevier, vol. 112(C), pages 219-237.
    5. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2017. "Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks," CESifo Working Paper Series 6700, CESifo Group Munich.
    6. Emil Verner, 2018. "Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis," 2018 Meeting Papers 591, Society for Economic Dynamics.
    7. Bryan Hardy, 2018. "Foreign currency borrowing, balance sheet shocks and real outcomes," BIS Working Papers 758, Bank for International Settlements.
    8. Laura Alfaro & Alejandro Cuñat & Harald Fadinger & Yanping Liu, 2018. "The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis," NBER Working Papers 24633, National Bureau of Economic Research, Inc.
    9. Felipe Benguria & Felipe Saffie & Sergio Urzúa, 2018. "The Transmission of Commodity Price Super-Cycles," NBER Working Papers 24560, National Bureau of Economic Research, Inc.
    10. Alfaro, Laura & Cunat, Alejandro & Fadinger, Harald & Yanping, Liu, 2017. "The real exchange rate, innovation and productivity," Working Papers 17-04, University of Mannheim, Department of Economics.

    More about this item

    Keywords

    currency mismatch; Firm Dynamics; foreign currency debt; uncovered interest rate parity;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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