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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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    5. Bernabe Lopez‐Martin, 2022. "Firm Export Dynamics And The Exchange Rate: A Quantitative Exploration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 1137-1163, August.
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    7. Hardy, Bryan, 2023. "Foreign currency borrowing, balance sheet shocks, and real outcomes," Journal of International Money and Finance, Elsevier, vol. 139(C).
    8. Laura Alfaro & Mauricio Calani & Liliana Varela, 2021. "Granular Corporate Hedging Under Dominant Currency," NBER Working Papers 28910, National Bureau of Economic Research, Inc.
    9. Egemen Eren & Semyon Malamud, 2018. "Dominant Currency Debt," Swiss Finance Institute Research Paper Series 18-55, Swiss Finance Institute.
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    12. Minsuk Kim, 2019. "Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence," IMF Working Papers 2019/168, International Monetary Fund.
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    15. Hsu, Po-Hsuan & Taylor, Mark P. & Wang, Zigan & Xu, Qi, 2022. "Currency volatility and global technological innovation," Journal of International Economics, Elsevier, vol. 137(C).
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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