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Foreign currency exposure and balance sheet effects: A firm-level analysis for Korea

Yun Jung Kim

Emerging Markets Review, 2016, vol. 26, issue C, 64-79

Abstract: If firms match the currency composition of their liabilities with that of their assets or income, a currency depreciation will have an ambiguous effect on investment of firms holding foreign debt. Using Korean firm-level data, we first find evidence of currency matching. We then show that foreign debt has a significant negative balance sheet effect on firm investment following a depreciation, once foreign assets and exports are controlled for. The balance sheet effect is particularly severe for firms subject to financial constraints. The inclusion of foreign assets is important for identifying the balance sheet effect separately from the competitiveness effect.

Keywords: Foreign currency debt; Currency matching; Balance sheet effects; Korean economy (search for similar items in EconPapers)
JEL-codes: E44 F32 F34 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.ememar.2016.02.001

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