Does Exchange Rate Depreciation Have Contractionary Effects on Firm-Level Investment?
43 Pages Posted: 13 Mar 2018
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Does Exchange Rate Depreciation Have Contractionary Effects on Firm-Level Investment?
Date Written: February 21, 2018
Abstract
We assess the conditions under which exchange rate fluctuations are contractionary for firm-level investment. To address this question, we match firm-level balance sheet data with a large dataset of firm-level bonds for about 1,000 firms from 36 emerging market economies over the period 1998–2014.
We augment a standard firm-level investment model to control for (country-specific) macroeconomic variables, and interact the effect of an exchange rate depreciation with several dimensions of bond composition, namely:
1) currency of issuance;
2) maturity structure of bonds; and
3) market of issuance.
We find that, conditional on the amount of debt issued in foreign currency, an exchange rate depreciation can have a contractionary impact on a firm’s investment spending. We also find that the market of issuance and maturity structure, in particular, when coupled with foreign currency-denominated debt can influence this impact.
Keywords: investment, exchange rate, balance sheet, bonds, firm-level data, debt
JEL Classification: F2, F3, E2, E3
Suggested Citation: Suggested Citation