Does Exchange Rate Depreciation Have Contractionary Effects on Firm-Level Investment?

43 Pages Posted: 13 Mar 2018

See all articles by José María Serena

José María Serena

Bank for International Settlements (BIS)

Ricardo Sousa

European Stability Mechanism

Multiple version iconThere are 2 versions of this paper

Date Written: February 21, 2018


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

Serena, Jose Maria and Sousa, Ricardo, Does Exchange Rate Depreciation Have Contractionary Effects on Firm-Level Investment? (February 21, 2018). European Stability Mechanism Working Paper No. 26; ISBN 978-92-95085-47-3. Available at SSRN: or

Jose Maria Serena (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

Ricardo Sousa

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale

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