Template-Type: ReDIF-Paper 1.0
Author-Name: Ryan Niladri Banerjee
Author-X-Name-First: Ryan Niladri
Author-X-Name-Last: Banerjee
Author-Name: Boris Hofmann
Author-X-Name-First: Boris
Author-X-Name-Last: Hofmann
Author-Name: Aaron Mehrotra
Author-X-Name-First: Aaron
Author-X-Name-Last: Mehrotra
Title: Corporate investment and the exchange rate: The financial channel
Abstract: Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies.
Length: 34 pages
Creation-Date: 2020-02
File-URL: https://www.bis.org/publ/work839.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work839.htm
File-Format: text/html
Number: 839
Classification-JEL: E22, F31, F41, O16
Keywords: corporate investment, emerging markets, exchange rates, financial channel, financial constraints
Handle: RePEc:bis:biswps:839