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New spare tires: local currency credit as a global shock absorber

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  • Avdjiev, Stefan
  • Burger, John D.
  • Hardy, Bryan

Abstract

It is well-known that dollar credit to emerging market (EM) corporates has expanded dramatically in the past two decades. However, the concurrent expansion of local currency credit, facilitated by more developed domestic financial systems, has been less recognized. This paper first uses data on EM corporates' borrowing through bonds and syndicated loans to show the considerable rise of their local currency debt. It then utilizes comprehensive firm-level data to document that EM corporates' local currency borrowing can offset shocks to their dollar debt, and how this varies across firms and countries. A broad dollar appreciation is associated with a decline in credit to ''local'' firms (smaller, non-exporting, with low profitability) but has no significant impact on ''global'' firms (larger, exporting, highly profitable). Firms in the mid-range (of these dimensions) see lower dollar debt in response to a stronger dollar, but replace it with local currency debt, thus offsetting the shock.

Suggested Citation

  • Avdjiev, Stefan & Burger, John D. & Hardy, Bryan, 2024. "New spare tires: local currency credit as a global shock absorber," CEPR Discussion Papers 19288, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19288
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    Cited by:

    1. is not listed on IDEAS
    2. Faia, Ester & Lewis, Karen K. & Zhou, Haonan, 2025. "Do investor differences impact monetary policy spillovers to emerging markets?," Journal of International Economics, Elsevier, vol. 156(C).
    3. Torsten Ehlers & Bryan Hardy & Patrick McGuire, 2025. "International finance through the lens of BIS statistics: the international dimensions of credit," BIS Quarterly Review, Bank for International Settlements, March.
    4. Laura Alfaro & Julian Caballero & Bryan Hardy, 2025. "FX debt and optimal exchange rate hedging," BIS Working Papers 1303, Bank for International Settlements.
    5. Duffee, Gregory R. & Hördahl, Peter, 2025. "Debt specialization and diversification: International evidence," Journal of International Money and Finance, Elsevier, vol. 157(C).

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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