Why is dollar debt Cheaper? Evidence from Peru

Bryan Gutierrez, Victoria Ivashina and Juliana Salomao

Journal of Financial Economics, 2023, vol. 148, issue 3, 245-272

Abstract: In emerging markets, a significant share of corporate loans are denominated in dollars. Using novel data that includes loan-level currency and the cost of credit, in addition to several other transaction-level characteristics, we re-examine the reasons behind dollar credit popularity. We find that a dollar-denominated loan has an interest rate that is 2 percentage points lower per year than a loan in local currency. Expectations of exchange rate movements do not explain this difference. We show that this interest rate differential for lending rates is closely matched by the differential in the deposit market. Our results suggest that the preference for dollar loans is rooted in the local depositors preference for dollar savings, and a banking sector that is strongly incentivized to closely match its foreign-currency assets and liabilities. Cross-borrower variation points to competitive pressure among banks to explain the significant pass-through of this differential.

Keywords: Dollar loans; UIP; Bank regulatio (search for similar items in EconPapers)
JEL-codes: F31 F34 G21 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:148:y:2023:i:3:p:245-272

DOI: 10.1016/j.jfineco.2023.04.003

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