The Dominant Currency Financing Channel of External Adjustment

Camila Casas, Sergii Meleshchuk and Yannick Timmer

No 10514, CESifo Working Paper Series from CESifo

Abstract: We propose a new channel through which exchange rates affect trade. Exploiting the heterogeneity in firms’ foreign currency debt maturity structure around a large depreciation in Colombia, we show that debt revaluation compresses imports due to higher delinquencies and interest rates, while exports are unaffected. Natural and financial hedging successfully mute the import contraction. A costly state verification model with dominant currency financing (DCF) and exporting rationalizes these findings. Quantitatively, DCF explains a significant part of external adjustment in addition to the expenditure switching channel. Pricing exports in the dominant vs. producer currency mutes the effect of DCF on trade.

Keywords: imports; exports; foreign currency exposure; capital structure; exchange rates; debt revaluation; hedging (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 G15 G21 G32 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-opm and nep-rmg
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Related works:
Working Paper: The Dominant Currency Financing Channel of External Adjustment (2023)
Working Paper: The Dominant Currency Financing Channel of External Adjustment (2022)
Working Paper: The Dominant Currency Financing Channel of External Adjustment (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10514

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