Corporate investment and the exchange rate : The financial channel

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dc.contributor Bank of Finland
dc.contributor.author Banerjee, Ryan
dc.contributor.author Hofmann, Boris
dc.contributor.author Mehrotra, Aaron
dc.date.accessioned 2020-03-03T13:26:49Z
dc.date.available 2020-03-03T13:26:49Z
dc.date.issued 2020
dc.identifier.isbn 978-952-323-317-1
dc.identifier.issn 1456-5889
dc.identifier.uri https://helda.helsinki.fi/bof/handle/123456789/16964
dc.description.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.
dc.description.tableofcontents Abstract .. 4 1 Introduction .. 5 Related literature .. 8 2 Model .. 10 Foreign currency borrowing .. 10 Borrowing in local currency .. 13 Main predictions for the empirical analysis .. 15 3 Data .. 15 4 Testing for the financial channel in firm investment dynamics .. 19 5 Robustness checks .. 26 6 The cash flow sensitivity of cash and the exchange rate .. 27 7 Conclusions .. 29 References .. 31
dc.format.extent 35
dc.language.iso ENG
dc.rights https://helda.helsinki.fi/bof/copyright
dc.subject Bofit-kokoelma
dc.subject kehittyvät markkinat
dc.subject.other corporate investment
dc.subject.other emerging markets
dc.subject.other exchange rates
dc.subject.other financial channel
dc.subject.other financial constraints
dc.title Corporate investment and the exchange rate : The financial channel
dc.type Paper
dc.identifier.urn URN:NBN:fi:bof-202003032009
dc.subject.jel E22
dc.subject.jel F31
dc.subject.jel F41
dc.subject.jel O16
dc.series.name BOFIT Discussion Papers
dc.series.year 2020
dc.series.number 6/2020
dc.series.sortingnumber 0006
dc.date.publication 27.2.2020
dc.subject.yso investoinnit
dc.subject.yso yritykset
dc.subject.yso valuuttakurssit
dc.contributor.orgunit Institute for Economies in Transition (BOFIT)
dc.type.okm D4

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