Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Boston
Working Papers
Corporate dollar debt and depreciations: much ado about nothing?
Hoyt Bleakley
Kevin Cowan

Much has been written recently about the problems for emerging markets that might result from a mismatch between foreign-currency denominated liabilities and assets (or income flows) denominated in local currency. In particular, several models, developed in the aftermath of financial crises of the late 1990s, suggest that the expansion in the "peso" value of "dollar" liabilities resulting from a devaluation could, via a net-worth effect, offset the expansionary competitiveness effect. Assessing which effect dominates, however, is ultimately an empirical matter. In this vein, we construct a new database with accounting information (including the currency composition of liabilities) for over 450 non-financial firms in five Latin American countries. We estimate, at the firm level, the reduced-form effect on investment of holding foreign-currency-denominated debt during an exchange-rate realignment. We consistently find that this effect is positive, contrary to the predicted sign of the net-worth effect. Additionally, we show that the estimated coefficient can be decomposed into competitiveness and net-worth effects, and we provide direct evidence that the competitiveness effect dominates the net-worth effect. We discuss some out-of-sample implications of these results.

Download Full text
Download Full text
Cite this item
Hoyt Bleakley & Kevin Cowan, Corporate dollar debt and depreciations: much ado about nothing?, Federal Reserve Bank of Boston, Working Papers 02-5, 2002.
More from this series
JEL Classification:
Subject headings:
Keywords: Foreign exchange ; Devaluation of currency ; Latin America
For corrections, contact Catherine Spozio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal