Foreign currency borrowing, balance sheet shocks, and real outcomes

Abstract

This paper uses a unique dataset and improved identification to uncover several new aspects of foreign currency (FX) balance sheet shocks. First, shocked firms see a contraction in their FX loan borrowing, but large firms are able to replace the lost borrowing with local currency loans. Second, the cost of borrowing in FX increases for these firms, contributing to the shift away from FX credit. Third, larger banks are less sensitive in their FX lending to such shocks to their individual borrowers. Fourth, there are no real effects for large firms, but small firms see lower credit and profits, and decrease investment and employment of hourly workers.