From Carry Trades to Trade Credit: Financial Intermediation by Nonfinancial Corporations

50 Pages Posted: 3 Apr 2019

See all articles by Bryan Hardy

Bryan Hardy

Bank for International Settlements (BIS) - Monetary and Economic Department

Felipe Saffie

University of Maryland

Date Written: March 2019

Abstract

We use unique firm level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency and lending in domestic currency, largely to related partners (trade credit), accumulating currency risk in the process. The interest rate differential between local and foreign currency borrowing largely drives this behavior at a quarterly frequency, inducing an expansion in gross trade credit and sales. Firms that were active in carry-trade have decreased investment following a large depreciation, independent of currency exposure levels and export status, but maintain their supply of trade credit.

Keywords: Emerging Market Corporate Debt, Currency Mismatch, Liability Dollarization, Carry Trades, Trade Credit

JEL Classification: E44, G15

Suggested Citation

Hardy, Bryan and Saffie, Felipe, From Carry Trades to Trade Credit: Financial Intermediation by Nonfinancial Corporations (March 2019). BIS Working Paper No. 773. Available at SSRN: https://ssrn.com/abstract=3350794

Bryan Hardy (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Felipe Saffie

University of Maryland ( email )

College Park, MD 20742
United States

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