Do government guarantees really matter in fixed exchange rate regimes?

Arbeitspapier

Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes induce excessive borrowing in foreign currency as an optimal response to implicit guarantees that the government will not devalue the domestic currency. Using data on Brazilian firms before and after the end of the fixed exchange rate regime in 1999, we estimate the relevance of the government guarantees by comparing the changes in foreign debt of two groups of firms: those that hedged their foreign currency debt prior to the exchange rate float and those that did not. Using the difference-in-differences approach, in which firm-specific characteristics are introduced as control variables, we exclude the macroeconomic effects of the change in the exchange rate regime and the possible differences in foreign debt trends of the two groups of firms, thus obtaining an estimate of the impact of the government guarantees on borrowing in foreign currency. The results suggest that the guarantees do not induce excessive borrowing in foreign currency

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Texto para discussão ; No. 666

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange ; International Lending and Debt Problems ; International Financial Markets ; General Financial Markets: Government Policy and Regulation
• Subject: Foreign Exchange Risk ; Government Guarantees ; Exchange rate regime ; Hedging

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Janot, Marcio Magalhães ; Garcia, Márcio Gomes Pinto
• Event: Veröffentlichung
• (who): Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia
• (where): Rio de Janeiro
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/186132
• Last update: 10.03.2025, 11:44 AM CET