Does exchange rate depreciation have contractionary effects on firm-level investment?
Jose Maria Serena Garralda and
Ricardo Sousa ()
No 624, BIS Working Papers from Bank for International Settlements
We assess the conditions under which exchange rate fluctuations are contractionary for firm-level investment. To address this question, we match firm-level balance sheet data with a large dataset of firm-level bonds for about 1,000 firms from 36 emerging market economies over the period 1998-2014. We augment a standard firm-level investment model to control for (country-specific) macroeconomic variables, and interact the effect of an exchange rate depreciation with several dimensions of bond composition, namely: 1) currency of issuance; 2) maturity structure of bonds; and 3) market of issuance. We find that, conditional on the amount of debt issued in foreign currency, an exchange rate depreciation can have a contractionary impact on a firm's investment spending. We also find that the market of issuance and maturity structure, in particular, when coupled with foreign currency-denominated debt can influence this impact.
Keywords: investment; exchange rate; balance sheet; bonds; firm-level data; debt (search for similar items in EconPapers)
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Working Paper: Does exchange rate depreciation have contractionary effects on firm-level investment? (2018)
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