DP12654 Exchange Rate Exposure and Firm Dynamics

Author(s): Juliana Salomao, Liliana Varela
Publication Date: January 2018
Date Revised: July 2018
Keyword(s): currency mismatch, Firm Dynamics, foreign currency debt, uncovered interest rate parity
JEL(s): F30, F34, F36
Programme Areas: International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12654

This paper develops a heterogeneous firm-dynamics model with endogenous currency debt composition to jointly study financing and investment decisions in developing economies. In our model, firms' foreign currency borrowing arises from a trade-off between exposure to currency risk and 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. Our counterfactual exercises show that foreign currency borrowing can lead to higher growth and that the efficiency of the banking sector to screen productive and capital-scarce firms is essential to reap up the benefits of this financing.