Foreign Currency Debt and Exchange Rate Pass-Through

Anna Burova, Konstantin Egorov () and Dmitry Mukhin ()
Additional contact information
Konstantin Egorov: New Economic School
Dmitry Mukhin: London School of Economics

No wps93, Bank of Russia Working Paper Series from Bank of Russia

Abstract: This paper studies both theoretically and empirically the firm’s choice of currency for its debt. We use a parsimonious model with financial frictions to derive an intuitive sufficient statistic for the share of foreign-currency debt in firm’s liabilities and demonstrate its robustness in several extensions. Due to the risk management considerations, firms are more likely to borrow in dollars when the pass-through of the exchange rate into their profits is higher. We leverage this insight empirically using the micro-level data on loans issued by Russian banks to local firms as well as the data on firms’ balance sheets and cash flows. The data strongly supports the predictions of the model indicating that firms with profits more stable in dollars are more likely to borrow in foreign currency than firms with profits stable in local currency. These results extend to a choice between the euro and the dollar and survive after controlling for firms’ size and export status. Note that our results describe efficiency at the firm level, and they do not have direct implications for macroprudential policy as foreign currency debt may also affect exchange rate volatility, inflation and output.

Keywords: currency choice; invoicing currency; borrowing currency; dollar in global economy; bank loans; exporter status; optimal debt composition (search for similar items in EconPapers)
JEL-codes: D22 F31 F34 G11 G21 G32 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cis, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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