Foreign currency borrowing and knowledge about exchange rate risk

Elisabeth Beckmann and Helmut Stix

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

Abstract: Foreign currency borrowing is widespread in many regions of the world. This raises the question whether unhedged borrowers do not understand the exchange rate risk emanating from such loans. Employing household level micro-data from eight Central and Eastern European countries the authors study how agents’ knowledge about exchange rate risk affects the currency denomination of loans. Results show, first, that a majority of respondents is aware that depreciations increase loan installments and, secondly, that knowledge about the exchange rate risk lowers the demand for foreign currency borrowing. To assess the causal effect of literacy on loan demand the authors utilize information on agents’ exchange rate expectations. Overall, results suggest that financial literacy exerts a strong impact on the choice of the loan currency. However, from an aggregate perspective, a misunderstanding of the underlying risks is not the main cause of foreign currency borrowing.

Keywords: Foreign; currency; borrowing; and; knowledge; about; exchange; rate; risk (search for similar items in EconPapers)
JEL-codes: D12 D80 G11 (search for similar items in EconPapers)
Pages: 39
Date: 2014-03-18
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.oenb.at/dam/jcr:0bb31530-14bb-4163-9cb ... d6c/WP188_screen.pdf (application/pdf)

Related works:
Journal Article: Foreign currency borrowing and knowledge about exchange rate risk (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:onb:oenbwp:188

Ordering information: This working paper can be ordered from
Oesterreichische Nationalbank, Economic Studies Division, POB 61, A-1011 Vienna, Austria

The price is The price is Free subject to availability..

Access Statistics for this paper

More papers in Working Papers from Oesterreichische Nationalbank (Austrian Central Bank) P.O. Box 61, A-1011 Vienna, Austria. Contact information at EDIRC.
Bibliographic data for series maintained by Markus Knell ().