Exchange rate exposure and firm dynamics

Juliana Salomao and Liliana Varela

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This article develops a heterogeneous firm-dynamics model to jointly study firms’ currency debt composition and investment choices. In our model, foreign currency borrowing arises from a dynamic trade-off between exposure to currency risk and growth. The model endogenously generates selection of productive firms into foreign currency borrowing. Among them, firms with high marginal product of capital use foreign loans more intensively. We assess econometrically the model’s predicted pattern of foreign currency borrowing using firm-level census data from the deregulation of these loans in Hungary, calibrate the model, and quantify the aggregate impact of this financing. Our counterfactual exercises show that understanding the characteristics of firms borrowing in foreign currency is critical to assess the aggregate consequences of this financing.

Keywords: firm dynamics; foreign currency debt; currency mismatch; uncovered interest rate parity (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2022-01-01
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in Review of Economic Studies, 1, January, 2022, 89(1), pp. 481 - 514. ISSN: 0034-6527

Downloads: (external link)
http://eprints.lse.ac.uk/108168/ Open access version. (application/pdf)

Related works:
Journal Article: Exchange Rate Exposure and Firm Dynamics (2022)
Working Paper: Exchange rate exposure and firm dynamics (2020)
Working Paper: Exchange Rate Exposure and Firm Dynamics (2018)
Working Paper: Exchange Rate Exposure and Firm Dynamics (2018)
Working Paper: Exchange Rate Exposure and Firm Dynamics (2018)
Working Paper: Exchange Rate Exposure and Firm Dynamics (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:108168

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