The Dominant Currency Financing Channel of External Adjustment

Abstract

We provide evidence on a new transmission channel of exchange rate movements to net exports. Using a novel identification strategy by exploiting firms' foreign currency debt and debt maturity structure in Colombia, we analyze the trade response of firms that are financially more exposed to a depreciation through a debt revaluation channel. We show that while exports are unaffected by the debt revaluation, imports contract more sharply for firms with larger financial exposure to the depreciation. However, the import response is exclusively driven by firms that import but do not export. The results can be rationalized by a model where exporters are shielded from debt revaluation as they have revenues in foreign currency. We conclude that dominant currency financing strengthens the expansionary impact of a depreciation on the trade balance.

Exchange Rate Elasticities of International Tourism and the Role of Dominant Currency Pricing

“…One potential hypothesis that has been put forward in the literature is that US dollar pricing and financing complements each other. For example, Casas, Meleshchuk and Timmer (2020) show that exporting in the US dollar provides a natural hedge against a depreciation for firms borrowing in the US dollar. Given the uniquely important role of the dollar in internaitonal finance especially for firms in emerging market and developing countries including those in the tourism industry, it is conceivable that the need to service the dollar debt gives tourism exporters incentives to price their products in the dollar.…”

“…If the debtor (such as the hotel) does not not have offsetting revenues in the dollar, the depreciation will lead to a negative net worth impact. However, if the revenue of the debtor is also in the dollar (by invoicing hotel services in the dollar), this can provide a hedge against the increase in debt repayments in local currency terms (Casas, Meleshchuk and Timmer 2020).…”

The Colombian peso depreciation of 2014-2015 and the adjustment of trade in the manufacturing sector

“…Similarly, a depreciation has an immediate effect on the debt denominated in foreign currency held by firms (for an analysis of this type of "balance sheet effects" see Aguiar, 2005, andCasas et al, 2020 for an analysis of the Colombian case). More generally, firms will have trouble expanding exports and/or imports if they have financing constraints (Berman and Berthou, 2009;Berman and Héricourt, 2010;Muûls, 2015), or if the depreciation coincides with an economy-wide shortage of financing (Amiti and Weinstein, 2011).…”

Currencies of External Balance Sheets

“…For papers documenting mismatches at the firm-level, seeCasas et al (2023) andAlfaro et al (2021).13We also focus on the association between trade and financing in dominant currencies, without making any causal claims.11 ©International Monetary Fund. Not for Redistribution…”