The Dominant Currency Financing Channel of External Adjustment

Camila Casas, Sergii Meleshchuk () and Yannick Timmer
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Sergii Meleshchuk: https://www.imf.org/en/Research/Researcher-CV/Author/Meleshchuk-Sergii?AuthID=357#Background

No 1343, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We provide evidence of a new channel of how exchange rates affect trade. Using a novel identification strategy that exploits firms' foreign currency debt maturity structure in Colombia around a large depreciation, we show that firms experiencing a stronger debt revaluation of dominant currency debt due to a home currency depreciation compress imports relatively more while exports are unaffected. Dominant currency financing does not lead to an import compression for firms that export, hold foreign currency assets, or are active in the foreign exchange derivatives markets, as they are all hedged against a revaluation of their debt. These findings can be rationalized through the prism of a model with costly state verification and foreign currency borrowing. Dominant currency pricing mutes the effects of dominant currency financing on imports relative to producer currency pricing.

Keywords: Imports; Exports; Foreign Currency Exposure; Capital Structure; Exchange Rates; Debt Revaluation; Hedging (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 G15 G21 G32 (search for similar items in EconPapers)
Pages: 86 p.
Date: 2022-05-12
New Economics Papers: this item is included in nep-mon and nep-opm
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https://www.federalreserve.gov/econres/ifdp/files/ifdp1343.pdf (application/pdf)

Related works:
Working Paper: The Dominant Currency Financing Channel of External Adjustment (2023)
Working Paper: The Dominant Currency Financing Channel of External Adjustment (2023)
Working Paper: The Dominant Currency Financing Channel of External Adjustment (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1343

DOI: 10.17016/IFDP.2022.1343

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