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Corporate investment and the exchange rate: The financial channel
Author(s) -
Banerjee Ryan,
Hofmann Boris,
Mehrotra Aaron
Publication year - 2022
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12415
Subject(s) - stylized fact , depreciation (economics) , economics , monetary economics , exchange rate , currency , leverage (statistics) , foreign direct investment , investment (military) , foreign exchange risk , financial system , macroeconomics , financial capital , capital formation , market economy , machine learning , politics , computer science , law , political science , human capital
Currency depreciation dampens corporate investment through a financial channel. Using firm‐level data for 16 major economies, we find that depreciation reduces investment by interacting with firm leverage. The finding is consistent with predictions from a stylized model of credit risk in which the exchange rate affects credit supply and investment when firms borrow in foreign currency, or in local currency from foreign lenders. Empirically, the channel is significantly more pronounced in emerging market economies (EMEs), reflecting greater dependence on foreign funding and less developed financial systems. Our findings suggest that the depreciation of EME currencies since 2011 probably contributed in a significant way to the investment slowdown in these economies.