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Exchange Rate Exposure and Firm Dynamics

Author

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  • Varela, Liliana

    (University of Warwick, University of Houston, CEPR and CAGE,)

  • Salomao, Juliana

    (University of Minnesota)

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

  • Varela, Liliana & Salomao, Juliana, 2018. "Exchange Rate Exposure and Firm Dynamics," The Warwick Economics Research Paper Series (TWERPS) 1157, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:1157
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    Cited by:

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    2. Delis, Manthos D. & Politsidis, Panagiotis N. & Sarno, Lucio, 2022. "The cost of foreign-currency lending," Journal of Banking & Finance, Elsevier, vol. 136(C).
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    4. 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.
    5. Egemen Eren & Semyon Malamud, 2018. "Dominant Currency Debt," Swiss Finance Institute Research Paper Series 18-55, Swiss Finance Institute.
    6. 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.
    7. Bernabe Lopez-Martin, 2019. "Firm Export Dynamics and the Exchange Rate: A Quantitative Exploration," Working Papers 2019-05, Banco de México.
    8. Minsuk Kim, 2019. "Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence," IMF Working Papers 2019/168, International Monetary Fund.
    9. Omar Barbiero, 2021. "The Valuation Effects of Trade," Working Papers 21-11, Federal Reserve Bank of Boston.
    10. Felipe Benguria & Felipe Saffie & Sergio Urzúa, 2018. "The Transmission of Commodity Price Super-Cycles," NBER Working Papers 24560, National Bureau of Economic Research, Inc.
    11. Rodnyansky, A., 2018. "(Un)Competitive Devaluations and Firm Dynamics," Cambridge Working Papers in Economics 1888, Faculty of Economics, University of Cambridge.
    12. Kalemli-Ozcan, Sebnem, 2019. "US Monetary Policy and International Risk Spillovers," CEPR Discussion Papers 14053, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    firm dynamics foreign currency ; debt ; currency mismatch ; uncovered interest rate parity;
    All these keywords.

    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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