Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence
IMF Working Papers, August 2, 2019
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- Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence
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Bibliographic details
- Authors: Minsuk Kim
- Published: August 2, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513508979.001
Objective and analytical approach
- Examines how financial development influences the debt dollarization of nonfinancial firms in a sample of emerging market economies (EMEs).
- Macroeconomic channels are identified from an optimal portfolio allocation model.
- Channels are assessed empirically using accounting information of nonfinancial firms from 21 EMEs during 2009–2017.
- Financial development is measured by the private credit-to-GDP ratio.
Key empirical findings
- 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.
- The effect of exchange rate volatility becomes statistically insignificant beyond an estimated threshold credit-to-GDP ratio of 100 percent.
- Sample coverage: 21 EMEs; sample period: 2009–2017.
Mechanisms and channels identified
- The study links macroeconomic channels from an optimal portfolio allocation model to firm-level debt currency choices.
- Financial development operates through multiple channels, with the dominant documented channel being the attenuation of exchange rate volatility’s influence on debt currency composition.
Policy implications (inferred from findings)
- Strengthening financial development (as captured by higher private credit-to-GDP ratios) can reduce firms’ sensitivity to exchange rate volatility when choosing debt currency, potentially lowering balance-sheet currency mismatch risks.
- Achieving a private credit-to-GDP ratio at or above the estimated threshold of 100 percent is associated with exchange rate volatility becoming statistically insignificant in influencing debt currency composition, suggesting a policy target to mitigate debt dollarization risks.
Source: IMF Working Paper "Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence" by Minsuk Kim, August 2, 2019.
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