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Exchange Rate Exposure and Firm Dynamics

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  • Juliana Salomao

    (University of Minnesota)

  • Liliana Varela

    (University of Warwick)

Abstract

This paper develops a firm-dynamics model with endogenous currency debt composition to study financing and investment decisions in developing economies. In our model, foreign currency borrowing arises from a trade-off between exposure to currency risk and growth. There is cross-sectional heterogeneity in these decisions in two dimensions. First, there is selection into foreign currency borrowing, as only productive firms employ it. Second, there is heterogeneity in firms’ share of foreign currency loans, driven by their potential 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.

Suggested Citation

  • Juliana Salomao & Liliana Varela, 2018. "Exchange Rate Exposure and Firm Dynamics," 2018 Meeting Papers 523, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:523
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    References listed on IDEAS

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    Cited by:

    1. Matteo Maggiori & Brent Neiman & Jesse Schreger, 2020. "International Currencies and Capital Allocation," Journal of Political Economy, University of Chicago Press, vol. 128(6), pages 2019-2066.
    2. 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.
    3. Bernabe Lopez-Martin, 2019. "Firm Export Dynamics and the Exchange Rate: A Quantitative Exploration," Working Papers 2019-05, Banco de México.
    4. Kohn, David & Leibovici, Fernando & Szkup, Michal, 2020. "Financial frictions and export dynamics in large devaluations," Journal of International Economics, Elsevier, vol. 122(C).
    5. Ahnert, Toni & Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2021. "Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?," Journal of Financial Economics, Elsevier, vol. 140(1), pages 145-174.
    6. Emil Verner & Győző Gyöngyösi, 2020. "Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis," American Economic Review, American Economic Association, vol. 110(9), pages 2667-2702, September.
    7. Minsuk Kim, 2019. "Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence," IMF Working Papers 2019/168, International Monetary Fund.
    8. Alfaro, Laura & Cunat, Alejandro & Liu, Yanping & Fadinger, Harald, 2018. "The real exchange rate, innovation and productivity : regional heterogeneity, asymmetries and hysteresis," Working Papers 18-05, University of Mannheim, Department of Economics.
    9. Cesa-Bianchi, Ambrogio & Ferrero, Andrea & Rebucci, Alessandro, 2018. "International credit supply shocks," Journal of International Economics, Elsevier, vol. 112(C), pages 219-237.
    10. Kose, Ayhan & Ohnsorge, Franziska & Sugawara, Naotaka, 2020. "Benefits and Costs of Debt: The Dose Makes the Poison," CEPR Discussion Papers 14439, C.E.P.R. Discussion Papers.
    11. Martijn Boermans & John Burger, 2020. "Global and local currency effects on euro area investment in emerging market bonds," DNB Working Papers 676, Netherlands Central Bank, Research Department.
    12. Egemen Eren & Semyon Malamud, 2019. "Dominant currency debt," BIS Working Papers 783, Bank for International Settlements.
    13. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2017. "Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks," CESifo Working Paper Series 6700, CESifo.
    14. Felipe Benguria & Felipe Saffie & Sergio Urzúa, 2018. "The Transmission of Commodity Price Super-Cycles," NBER Working Papers 24560, National Bureau of Economic Research, Inc.
    15. Ṣebnem Kalemli-Özcan, 2019. "U.S. Monetary Policy and International Risk Spillovers," NBER Working Papers 26297, National Bureau of Economic Research, Inc.
    16. Rodnyansky, A., 2018. "(Un)Competitive Devaluations and Firm Dynamics," Cambridge Working Papers in Economics 1888, Faculty of Economics, University of Cambridge.
    17. Bryan Hardy, 2018. "Foreign currency borrowing, balance sheet shocks and real outcomes," BIS Working Papers 758, Bank for International Settlements.
    18. Eren, Egemen & Malamud, Semyon, 2018. "Dominant Currency Debt," CEPR Discussion Papers 13391, C.E.P.R. Discussion Papers.
    19. Kalemli-Ozcan, Sebnem, 2019. "US Monetary Policy and International Risk Spillovers," CEPR Discussion Papers 14053, C.E.P.R. Discussion Papers.
    20. 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.
    21. 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.
    22. Ongena, Steven & Schindele, Ibolya & Vonnák, Dzsamila, 2021. "In lands of foreign currency credit, bank lending channels run through?," Journal of International Economics, Elsevier, vol. 129(C).

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    More about this item

    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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