The Dominant Currency Financing Channel of External Adjustment

Arbeitspapier

We propose a new channel through which exchange rates affect trade. Exploiting the heterogeneity in firms' foreign currency debt maturity structure around a large depreciation in Colombia, we show that debt revaluation compresses imports due to higher delinquencies and interest rates, while exports are unaffected. Natural and financial hedging successfully mute the import contraction. A costly state verification model with dominant currency financing (DCF) and exporting rationalizes these findings. Quantitatively, DCF explains a significant part of external adjustment in addition to the expenditure switching channel. Pricing exports in the dominant vs. producer currency mutes the effect of DCF on trade.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 10514

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange ; Current Account Adjustment; Short-term Capital Movements ; Open Economy Macroeconomics ; International Financial Markets ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: imports ; exports ; foreign currency exposure ; capital structure ; exchange rates ; debt revaluation ; hedging

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Casas, Camila ; Meleshchuk, Sergii ; Timmer, Yannick
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/279264
• Last update: 10.03.2025, 11:42 AM CET