Why is Dollar Debt Cheaper? Evidence from Peru

72 Pages Posted: 8 Jun 2020 Last revised: 29 Sep 2021

See all articles by Bryan Gutierrez

Bryan Gutierrez

University of Minnesota - Minneapolis - Department of Finance

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Juliana Salomao

University of Minnesota - Twin Cities - Carlson School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: September 24, 2021

Abstract

In emerging markets, a significant share of corporate loans are denominated in dollars. Using novel data that enables us to see currency and the cost of credit, in addition to several other transaction-level characteristics, we re-examine the reasons behind dollar credit popularity. We find that a dollar-denominated loan has an interest rate that is 2% lower per year than a loan in Peruvian Soles. Expectations of exchange rate movements do not explain this difference. We show that this interest rate differential for lending rates is closely matched by the differential in the deposit market. Our results suggest that the preference for dollar loans is rooted on the local household preference for dollar savings and a banking sector that is closely matching its foreign assets and liabilities. We find that borrower competitive pressure increases the pass-through of this differential.

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

JEL Classification: E44, G15

Suggested Citation

Gutierrez, Bryan and Ivashina, Victoria and Salomao, Juliana, Why is Dollar Debt Cheaper? Evidence from Peru (September 24, 2021). Available at SSRN: https://ssrn.com/abstract=3599475 or http://dx.doi.org/10.2139/ssrn.3599475

Bryan Gutierrez

University of Minnesota - Minneapolis - Department of Finance ( email )

United States

Victoria Ivashina (Contact Author)

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Juliana Salomao

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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