Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279264 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10514
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We propose a new channel through which exchange rates affect trade. Exploiting the heterogeneity in firms' foreign currency debt maturity structure around a large depreciation in Colombia, we show that debt revaluation compresses imports due to higher delinquencies and interest rates, while exports are unaffected. Natural and financial hedging successfully mute the import contraction. A costly state verification model with dominant currency financing (DCF) and exporting rationalizes these findings. Quantitatively, DCF explains a significant part of external adjustment in addition to the expenditure switching channel. Pricing exports in the dominant vs. producer currency mutes the effect of DCF on trade.
Subjects: 
imports
exports
foreign currency exposure
capital structure
exchange rates
debt revaluation
hedging
JEL: 
F31
F32
F41
G15
G21
G32
Document Type: 
Working Paper
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