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Does exchange rate depreciation have contractionary effects on firm-level investment?

21/02/2018
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Working papers

Does exchange rate depreciation have contractionary effects on firm-level investment?

Download PDF: Working Paper 26

Does exchange rate depreciation have contractionary effects on firm-level investment? The implications of alternative types of bond financing

This paper shows that exchange rate depreciations can have a contractionary impact on investment spending when firms hold foreign currency-denominated debt.

Authors: Jose Maria Serana (Bank for International Settlements) and Ricardo Sousa (European Stability Mechanism)

 

Abstract:

We assess the conditions under which exchange rate fluctuations are contractionary for firm-level investment. To address this question, we match firm-level balance sheet data with a large dataset of firm-level bonds for about 1,000 firms from 36 emerging market economies over the period 1998–2014. We augment a standard firm-level investment model to control for (country-specific) macroeconomic variables, and interact the effect of an exchange rate depreciation with several dimensions of bond composition, namely: 1) currency of issuance; 2) maturity structure of bonds; and 3) market of issuance. We find that, conditional on the amount of debt issued in foreign currency, an exchange rate depreciation can have a contractionary impact on a firm’s investment spending. We also find that the market of issuance and maturity structure, in particular, when coupled with foreign currency-denominated debt can influence this impact.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

JEL codes: F2, F3, E2, E3

Source: European Stability Mechanism | Working Paper Series | Volume 2018 | No 26 | February 2018 | 40 Pages
 

Copyright © European Stability Mechanism, 2018 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.

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