Foreign Currency Debt and Disagreement

Kenza Benhima, Isabella Blengini and Ouarda Merrouche

No 20580, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper highlights the disagreement channel of corporate foreign currency (FC) borrowing. In our model, if domestic agents have better information than foreign lenders on the state of the economy, FC borrowing might arise if the fundamentals are strong relative to what public signals suggest to foreigners. In these situations, international markets overestimate future currency depreciation, which increases the cost of borrowing in domestic currency. Domestic agents then borrow more in FC because they disagree with international lenders' pessimistic assessment. This mechanism is consistent with the data: empirically, we show that, controlling for fundamentals, negative public signals are associated with positive domestic currency excess returns and with more FC borrowing.

Keywords: Expectations (search for similar items in EconPapers)
JEL-codes: D83 F34 G15 (search for similar items in EconPapers)
Date: 2025-08
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