Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240357 
Year of Publication: 
2020
Series/Report no.: 
BOFIT Discussion Papers No. 6/2020
Publisher: 
Bank of Finland, Institute for Economies in Transition (BOFIT), Helsinki
Abstract: 
Using firm-level data for 18 major global economies, we find that the exchange rate affects corpo-rate investment through a financial channel: exchange rate depreciation dampens corporate invest-ment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies.
Subjects: 
corporate investment
emerging markets
exchange rates
financial channel
financial constraints
JEL: 
E22
F31
F41
O16
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-317-1
Document Type: 
Working Paper

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