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Local Currency Borrowing Constraints and Firm Behavior: Evidence from an Emerging Market

Author

Listed:
  • Mehmet Selman Colak
  • Tuba Pelin Sumer
  • Selay Sahan
  • Muhammed Hasan Yilmaz

Abstract

We analyze the financial and real effects of a 2022 Turkish regulation that restricts new local currency lending to firms whose asset dollarization exceeds specified thresholds. Using novel administrative data from January 2021–December 2023 and a difference-in-differences approach combined with propensity score matching, we find a medium-term decline in local currency borrowing among affected firms with a stronger impact for credit-constrained firms. We also document spillover effects, as firms substitute local currency loans with foreign currency loans, Turkish lira trade credit, and internal foreign currency liquidity. Extended analysis indicates that employment growth and net exports of affected firms declined, while operational volatility increased.

Suggested Citation

  • Mehmet Selman Colak & Tuba Pelin Sumer & Selay Sahan & Muhammed Hasan Yilmaz, 2026. "Local Currency Borrowing Constraints and Firm Behavior: Evidence from an Emerging Market," Working Papers 2614, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:2614
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2026/26-14
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    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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