Exchange Rate Fluctuations And Firm Leverage

Author : Mr.Ilhyock Shim,Sebnem Kalemli-Ozcan,Xiaoxi Liu
Publisher : INTERNATIONAL MONETARY FUND
Page : 40 pages
File Size : 52,9 Mb
Release : 2020-12-11
Category : Business & Economics
ISBN : 1513560948

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Exchange Rate Fluctuations and Firm Leverage by Mr.Ilhyock Shim,Sebnem Kalemli-Ozcan,Xiaoxi Liu Pdf

We quantify the effect of exchange rate fluctuations on firm leverage. When home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency debt. These firms can borrow more as a result and increase their leverage. When home currency depreciates, the reverse happens as firms have to de-lever with a negative shock to their balance sheets. Using firm-level data for leverage from 10 emerging market economies during the period from 2002 to 2015, we show that firms operating in countries whose non-financial sectors hold more of the debt in foreign currency, increase (decrease) their leverage relatively more after home currency appreciations (depreciations). Combining the leverage data with firm-level FX debt data for 4 emerging market countries, we further show that our results hold at the most granular level. Our quantitative results are asymmetric: the effects of depre-ciations, that are generally associated with sudden stops, are quantitatively larger than those of appreciations, which take place at a slower pace over time during capital inflow episodes. As our exercise compares depreciations and appreciations of similar size, these results are suggestive of financial frictions being more binding during depreciations than a possible relaxation of such frictions during appreciations.

Author : Mr.Adolfo Barajas,Sergio Restrepo,Mr.Roberto Steiner,Juan Camilo Medellin,Cesar Pabon
Publisher : International Monetary Fund
Page : 41 pages
File Size : 44,7 Mb
Release : 2017-11-22
Category : Business & Economics
ISBN : 9781484330562

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Currency Mismatches and Vulnerability to Exchange Rate Shocks: Nonfinancial Firms in Colombia by Mr.Adolfo Barajas,Sergio Restrepo,Mr.Roberto Steiner,Juan Camilo Medellin,Cesar Pabon Pdf

After building up foreign currency denominated (FC) liabilities over several years, Colombian firms might be vulnerable to a shift in external conditions. We undertake three empirical exercises to better understand these vulnerabilities. First, we identify the determinants of FC borrowing. Second, we investigate the implications for real activity, finding a balance sheet effect that transmits exchange rate fluctuations to investment and is asymmetric, much stronger for depreciations than for appreciations. Finally, we find that foreign exchange derivatives are not used solely for hedging, due in part to monetary authority intervention to smooth exchange rate volatility. However, a full explanation remains open for future research.

Author : Steve Brito,Mr.Nicolas E Magud,Mr.Sebastian Sosa
Publisher : International Monetary Fund
Page : 21 pages
File Size : 40,9 Mb
Release : 2018-05-10
Category : Business & Economics
ISBN : 9781484354834

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Real Exchange Rates, Economic Complexity, and Investment by Steve Brito,Mr.Nicolas E Magud,Mr.Sebastian Sosa Pdf

We show that the response of firm-level investment to real exchange rate movements varies depending on the production structure of the economy. Firms in advanced economies and in emerging Asia increase investment when the domestic currency weakens, in line with the traditional Mundell-Fleming model. However, in other emerging market and developing economies, as well as some advanced economies with a low degree of structural economic complexity, corporate investment increases when the domestic currency strengthens. This result is consistent with Diaz Alejandro (1963)—in economies where capital goods are mostly imported, a stronger real exchange rate reduces investment costs for domestic firms.

Author : Bo Jiang,Tahsin Saadi Sedik
Publisher : International Monetary Fund
Page : 47 pages
File Size : 52,9 Mb
Release : 2019-05-06
Category : Business & Economics
ISBN : 9781498314022

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The Turning Tide: How Vulnerable are Asian Corporates? by Bo Jiang,Tahsin Saadi Sedik Pdf

Using a new firm-level dataset with comprehensive information on Asian firms’ FX liabilities, we show that Asia’s nonfinancial corporate sector is vulnerable to a tightening of global financial conditions. Higher global interest rates and exchange rate depreciation increase the probability of default of Asian firms. A 30 percent currency depreciation is associated with a two-notch downgrade in the corporate credit rating (e.g., from A to BBB+), resulting in 7 percent of Asian firms falling into bankruptcy. But the impact is nonlinear—as the firms’ FX liability increases, the balance sheet channel of exchange rate offsets, then dominates, the competitiveness channel. The balance sheet channel offsets the competitiveness channel when the share of U.S. dollar debt is between 10 and 20 percent. We also find that currency depreciation increases firm-level investment on average, but for firms with the share of FX liabilities above 20 percent, investment contracts with depreciation.

Author : Zvi Wiener,Dan Galai
Publisher : International Monetary Fund
Page : 23 pages
File Size : 43,9 Mb
Release : 2009-05-01
Category : Business & Economics
ISBN : 9781451916874

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Credit Risk Spreads in Local and Foreign Currencies by Zvi Wiener,Dan Galai Pdf

The paper shows how-in a Merton-type model with bankruptcy-the currency composition of debt changes the risk profile of a company raising a given amount of financing, and thus affects the cost of debt. Foreign currency borrowing is cheaper when the exchange rate is positively correlated with the return on the company''s assets, even if the company is not an exporter. Prudential regulations should therefore differentiate among loans depending on the extent to which borrowers have "natural hedges" of their foreign currency exposures.

Author : Yakov Amihud,Richard M. Levich
Publisher : Irwin Professional Publishing
Page : 272 pages
File Size : 55,5 Mb
Release : 1994
Category : Corporations
ISBN : UCSD:31822016726366

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Exchange Rates and Corporate Performance by Yakov Amihud,Richard M. Levich Pdf

Exchange Rates and Corporate Performance contains the proceedings of a conference sponsored by the New York University Salomon Center at the Leonard N. Stern School of Business. This conference provided a forum for scholars and practitioners to present and discuss issues.

Author : Minsuk Kim
Publisher : International Monetary Fund
Page : 42 pages
File Size : 51,8 Mb
Release : 2019-08-02
Category : Business & Economics
ISBN : 9781513508979

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Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence by Minsuk Kim Pdf

This paper examines how financial development influences the debt dollarization of nonfinancial firms in a sample of emerging market economies (EMEs). The macroeconomic channels are identified from an optimal portfolio allocation model and assessed empirically using the accounting information of nonfinancial firms from 21 EMEs during 2009–2017. The results show that financial development, measured by the private credit-to-GDP ratio, mainly reduces the influence of exchange rate volatility in determining a firm's debt currency composition, among other channels. Furthermore, the effect of exchange rate volatility becomes statistically insignificant beyond an estimated threshold credit-to-GDP ratio of 100 percent.

Author : International Chamber of Commerce,International Chamber of Commerce. Working Party on Exchange Rate Instability
Publisher : Unknown
Page : 44 pages
File Size : 42,8 Mb
Release : 1985
Category : Foreign exchange
ISBN : UCSD:31822004901237

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Managing Exchange Rate Risks by International Chamber of Commerce,International Chamber of Commerce. Working Party on Exchange Rate Instability Pdf

Author : Sharjil M. Haque,Mr. Richard Varghese
Publisher : International Monetary Fund
Page : 51 pages
File Size : 45,8 Mb
Release : 2021-11-05
Category : Business & Economics
ISBN : 9781589064126

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The COVID-19 Impact on Corporate Leverage and Financial Fragility by Sharjil M. Haque,Mr. Richard Varghese Pdf

We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.

Author : Markus Brunnermeier,Arvind Krishnamurthy
Publisher : University of Chicago Press
Page : 288 pages
File Size : 40,9 Mb
Release : 2014-10-17
Category : Business & Economics
ISBN : 9780226092645

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Risk Topography by Markus Brunnermeier,Arvind Krishnamurthy Pdf

The recent financial crisis and the difficulty of using mainstream macroeconomic models to accurately monitor and assess systemic risk have stimulated new analyses of how we measure economic activity and the development of more sophisticated models in which the financial sector plays a greater role. Markus Brunnermeier and Arvind Krishnamurthy have assembled contributions from leading academic researchers, central bankers, and other financial-market experts to explore the possibilities for advancing macroeconomic modeling in order to achieve more accurate economic measurement. Essays in this volume focus on the development of models capable of highlighting the vulnerabilities that leave the economy susceptible to adverse feedback loops and liquidity spirals. While these types of vulnerabilities have often been identified, they have not been consistently measured. In a financial world of increasing complexity and uncertainty, this volume is an invaluable resource for policymakers working to improve current measurement systems and for academics concerned with conceptualizing effective measurement.

Author : Kodjovi M. Eklou
Publisher : International Monetary Fund
Page : 45 pages
File Size : 51,7 Mb
Release : 2023-05-26
Category : Business & Economics
ISBN : 9798400243950

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Dollar Exchange Rate Volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data by Kodjovi M. Eklou Pdf

This paper examines the impact of Dollar exchange rate volatility on firm productivity in Emerging Markets economies (EMs). Using firm level data covering 16 EMs over the period 1998 -2019, the paper shows that dollar exchange rate volatility reduces firm productivity growth. Exploring channels, its finds that the results are driven by countries with low level of financial development, high dollar invoicing, high bilateral trade with the US, high collective bargaining coverage and open capital account. Exploring the role of policy, it finds that Foreign Exchange Interventions (FXI) dampen this impact on firm productivty. Further, exploiting firm level data, the paper shows that dollar exchange rate volatility operates also through the financial friction channel, reducing contemporaneous investments, especially at firms with low liquidity buffers and weak balance sheet (high leverage). The role of financial frictions is confirmed through the finding that younger firms, more likely to face financial constraints, are also found to be more vulnerable to dollar exchange rate volatility. In addition, we also find evidence of a large and persistent effect on firms with highly irreversible investment, lending support for the real option channel of uncertainty on the dollar exchange rate. These findings are robust to a battery of tests, including controlling for uncertainty, financial crises and using an instrumental variable strategy exploiting US monetary policy shocks as an exogenous source of variation in dollar exchange rate volatility.

Author : Signe Krogstrup,Cédric Tille
Publisher : International Monetary Fund
Page : 64 pages
File Size : 40,6 Mb
Release : 2018-05-09
Category : Business & Economics
ISBN : 9781484353660

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Foreign Currency Bank Funding and Global Factors by Signe Krogstrup,Cédric Tille Pdf

The literature on the drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A concise portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. An analysis of a rich dataset of European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.

Author : Camila Casas,Mr.Federico Diez,Gita Gopinath,Pierre-Olivier Gourinchas
Publisher : International Monetary Fund
Page : 62 pages
File Size : 52,6 Mb
Release : 2017-11-22
Category : Business & Economics
ISBN : 9781484330609

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Dominant Currency Paradigm: A New Model for Small Open Economies by Camila Casas,Mr.Federico Diez,Gita Gopinath,Pierre-Olivier Gourinchas Pdf

Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Author : Burcu Adıgüzel Mercangöz
Publisher : Springer Nature
Page : 465 pages
File Size : 41,8 Mb
Release : 2021-02-17
Category : Business & Economics
ISBN : 9783030541088

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Handbook of Research on Emerging Theories, Models, and Applications of Financial Econometrics by Burcu Adıgüzel Mercangöz Pdf

This handbook presents emerging research exploring the theoretical and practical aspects of econometric techniques for the financial sector and their applications in economics. By doing so, it offers invaluable tools for predicting and weighing the risks of multiple investments by incorporating data analysis. Throughout the book the authors address a broad range of topics such as predictive analysis, monetary policy, economic growth, systemic risk and investment behavior. This book is a must-read for researchers, scholars and practitioners in the field of economics who are interested in a better understanding of current research on the application of econometric methods to financial sector data.

Author : Mr.Enrique G. Mendoza,MissZhanwei Z. Yue
Publisher : International Monetary Fund
Page : 56 pages
File Size : 53,7 Mb
Release : 2011-07-01
Category : Business & Economics
ISBN : 9781462302222

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A General Equilibrium Model of Sovereign Default and Business Cycles by Mr.Enrique G. Mendoza,MissZhanwei Z. Yue Pdf

Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-noc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios, and key business cycle moments.