How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America

March 1, 2012

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Format: Chicago

Herman Kamil. How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Using a unique dataset with information on the currency composition of firms' assets and liabilities in six Latin-American countries, I investigate how the choice of exchange rate regime affects firms' foreign currency borrowing decisions and the associated currency mismatches in their balance sheets. I find that after countries switch from pegged to floating exchange rate regimes, firms reduce their levels of foreign currency exposures, in two ways. First, they reduce the share of debt contracted in foreign currency. Second, firms match more systematically their foreign currency liabilities with assets denominated in foreign currency and export revenues--effectively reducing their vulnerability to exchange rate shocks. More broadly, the study provides novel evidence on the impact of exchange rate regimes on the level of un-hedged foreign currency debt in the corporate sector and thus on aggregate financial stability.

Subject: Currencies, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, External debt, Foreign currency debt, Foreign exchange, Money

Keywords: Currencies, Dollar liability, East Asia, Exchange rate, Exchange rate arrangements, Exchange rate flexibility, Exchange rate regime, Exchange rates, Exporter firm, Financing pattern, Foreign currency, Foreign currency debt, Investment response, Issues equity, Way firm, WP

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/069
Stock No:

WPIEA2012069
ISBN:

9781463939052
ISSN:

1018-5941

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