364/2018 Juliana Salomao and Liliana Varela
This paper develops a ﬁrm-dynamics model with endogenous currency debt composition to study ﬁnancing and investment decisions in developing economies. In our model, foreign currency borrowing arises from a trade-oﬀ between exposure to currency risk and growth. There is cross-sectional heterogeneity in these decisions in two dimensions. First, there is selection into foreign currency borrowing, as only productive ﬁrms employ it. Second, there is heterogeneity in ﬁrms’ share of foreign currency loans, driven by their potential growth. We assess econometrically the pattern of foreign currency borrowing using ﬁrm-level census data on Hungary, calibrate the model and quantify its aggregate impact.
The Review of Economic Studies