The Foreign Currency Fisher Channel: Evidence from Households

Abstract

We study how foreign currency debt exposure shapes household adjustment to a large exchange rate depreciation. Using household survey and bank customer data during Hungary’s 2008 currency crisis, we find that foreign currency borrowers cut consumption one-for-one with increased debt service, consistent with a foreign currency Fisher channel. Both the quantity and quality of expenditures decline, indicating a “flight from quality.” Debt revaluation has a limited effect on overall labor supply, but there is a substitution toward foreign income and home production. Our findings point to the relevance of open-economy models with incomplete markets, heterogeneous foreign currency exposures, and liquidity constraints.

Keywords: foreign currency debt, debt crisis, currency crisis, household consumption, labor supply

JEL Classification: E2, E3, G2, F3, D12