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Foreign currency borrowing and knowledge about exchange rate risk

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Abstract

Foreign currency borrowing is widespread in many regions of the world. This raises the question whether unhedged borrowers do not understand the exchange rate risk emanating from such loans. Employing household level micro-data from eight Central and Eastern European countries the authors study how agents’ knowledge about exchange rate risk affects the currency denomination of loans. Results show, first, that a majority of respondents is aware that depreciations increase loan installments and, secondly, that knowledge about the exchange rate risk lowers the demand for foreign currency borrowing. To assess the causal effect of literacy on loan demand the authors utilize information on agents’ exchange rate expectations. Overall, results suggest that financial literacy exerts a strong impact on the choice of the loan currency. However, from an aggregate perspective, a misunderstanding of the underlying risks is not the main cause of foreign currency borrowing.

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  • Elisabeth Beckmann & Helmut Stix, 2014. "Foreign currency borrowing and knowledge about exchange rate risk," Working Papers 188, Oesterreichische Nationalbank (Austrian Central Bank).
  • Handle: RePEc:onb:oenbwp:188
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    Cited by:

    1. Dzsamila Vonnak, 2015. "Decomposing the Riskiness of Corporate Foreign Currency Lending: the Case of Hungary," IEHAS Discussion Papers 1528, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    2. Aiba, Daiju & Odajima, Ken & Khou, Vouthy, 2017. "Foreign Currency Borrowing and Risk-Hedging Behavior: Evidence from a Household Survey in Cambodia," Working Papers 143, JICA Research Institute.
    3. repec:ukb:journl:y:2017:i:242:p:28-48 is not listed on IDEAS
    4. repec:onb:oenbfi:y:2018:i:q1-18:b:3 is not listed on IDEAS
    5. de Haas, R. & Brown, M. & Sokolov, V., 2015. "Regional Inflation, Financial Integration and Dollarization (This is a revision of CentER DP 2013-073)," Discussion Paper 2015-012, Tilburg University, Center for Economic Research.
    6. Martin Brown & Helmut Stix, 2015. "The euroization of bank deposits in Eastern Europe," Economic Policy, CEPR;CES;MSH, vol. 30(81), pages 95-139.
    7. Bettina Greimel-Fuhrmann & Maria Antoinette Silgoner & Rosa Weber, 2015. "Financial literacy gaps of the Austrian population," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 35-51.
    8. Elisabeth Beckmann, 2017. "How does foreign currency debt relief affect households’ loan demand? Evidence from the OeNB Euro Survey in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-32.
    9. Brown, M. & de Haas, R. & Sokolov, V., 2013. "Regional Inflation and Financial Dollarization," Discussion Paper 2013-073, Tilburg University, Center for Economic Research.
    10. ODAJIMA, Ken, 2016. "Foreign Currency Usage and Perception: Evidence from a Survey on Cambodian Households," Discussion Papers 2016-11, Graduate School of Economics, Hitotsubashi University.

    More about this item

    Keywords

    Foreign currency borrowing and knowledge about exchange rate risk;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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