Working Paper: CEPR ID: DP12654
Authors: Liliana Varela; Juliana Salomao
Abstract: This paper develops a heterogeneous firm-dynamics model to jointly study firms' currency debt composition and investment choices.In our model, foreign currency borrowing arises from a dynamic trade-off between exposure to currency risk and growth. The model endogenously generates selection of productive firms into foreign currency borrowing. Among them, firms with high marginal product of capital use foreign loans more intensively. We assess econometrically the model's predicted pattern of foreign currency borrowing using firm-level census data from the deregulation of these loans in Hungary, calibrate the model and quantify the aggregate impact of this financing. Our counterfactual exercises show that understanding the characteristics of firms borrowing in foreign currency is critical to assess the aggregate consequences of this financing.
Keywords: firm dynamics; foreign currency debt; currency mismatch; uncovered interest rate parity
JEL Codes: F30; F34; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deregulation of foreign currency loans (F31) | foreign currency borrowing (F34) |
| foreign currency borrowing (F34) | investment level (G31) |
| higher uncovered interest rate parity (UIP) deviations (F31) | foreign currency borrowing (F34) |
| foreign currency borrowing (F34) | balance sheet effects (G32) |
| foreign currency borrowing (F34) | capital accumulation (E22) |
| foreign currency borrowing (F34) | default rates (E43) |
| exchange rate market interventions (F31) | access to foreign loans (F34) |
| access to foreign loans (F34) | productivity threshold for borrowing (D24) |