Exchange rate exposure and firm dynamics

Salomao, Juliana and Varela, Liliana ORCID: 0000-0001-6139-1461 (2020) Exchange rate exposure and firm dynamics. Financial Markets Group Discussion Papers (801). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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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-o 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 assessing the allocation of foreign loans across firms is critical to understand their aggregate consequences.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2020 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	F - International Economics > F3 - International Finance > F31 - Foreign Exchange F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration
Date Deposited:	23 May 2023 23:04
Last Modified:	01 Oct 2024 04:04
URI:	http://eprints.lse.ac.uk/id/eprint/118906

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