Corporate Dollar Debt and Depreciations: Much Ado About Nothing?

FRB of Boston Working Paper No. 02-5

61 Pages Posted: 10 Mar 2003  

C. Hoyt Bleakley

University of Chicago - Booth School of Business; University of Chicago

Kevin Cowan

Inter-American Development Bank (IDB)

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2002

Abstract

Much has been written recently about the problems for emerging markets that might result from a mismatch between foreign-currency denominated liabilities and assets (or income flows) denominated in local currency. In particular, several models, developed in the aftermath of financial crises of the late 1990s, suggest that the expansion in the "peso" value of "dollar" liabilities resulting from a devaluation could, via a net-worth effect, offset the expansionary competitiveness effect. Assessing which effect dominates, however, is ultimately an empirical matter. In this vein, we construct a new database with accounting information (including the currency composition of liabilities) for over 450 non-financial firms in five Latin American countries. We estimate, at the firm level, the reduced-form effect on investment of holding foreign-currency-denominated debt during an exchange-rate realignment. We consistently find that this effect is positive, contrary to the predicted sign of the net-worth effect. Additionally, we show that the estimated coefficient can be decomposed into competitiveness and net-worth effects, and we provide direct evidence that the competitiveness effect dominates the net-worth effect. We discuss some out-of-sample implications of these results.

Keywords: investment, financial crises, net worth, currency mismatch, Latin America

Suggested Citation

Bleakley, C. Hoyt and Cowan, Kevin, Corporate Dollar Debt and Depreciations: Much Ado About Nothing? (December 20, 2002). FRB of Boston Working Paper No. 02-5. Available at SSRN: https://ssrn.com/abstract=366760 or http://dx.doi.org/10.2139/ssrn.366760

C. Hoyt Bleakley (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Kevin Cowan

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States
202-623-2607 (Phone)

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