Currency Denomination Of Debt Research Articles

Global sales, international currencies and the currency denomination of debt

We document that the currency denomination of the debt of developed country firms is strongly related to the geographical distribution of their sales. On average, a unit increase in the percentage of sales in a country is associated with an equivalent increase in the proportion of debt denominated in the corresponding currency. Consistent with the existence of fixed costs of debt issuance, we find that the relationship between the currency denomination of debt and the geography of sales vanishes below the 5% threshold for sales. Finally, we document significant home currency bias and international currency bias in debt issuance. In particular, we show that, controlling for the geography of sales, firms issue more debt denominated in their home currency and the two most traded currencies, the US dollar and the euro.

Public Debt and Growth

The recent global financial crisis has led to an unprecedented increase in public debt across the world, raising serious concerns about its economic impact. This paper examines the impact of high public debt on long‐run economic growth in a large panel of countries over the last four decades. High initial public debt is found to be significantly associated with slower subsequent growth. Non‐linearities, currency denomination of debt and differences between advanced and emerging market economies are explored. The adverse effect largely reflects a slowdown in labour productivity growth mainly due to slower capital accumulation. Extensive robustness checks confirm the results.

Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice

Conditional on choosing a pegged exchange rate regime, what determines the currency to which countries peg or anchor their exchange rate? This paper aims to answer this question using a panel multinomial logit framework, covering more than 100 countries for the period 1980-1998. We find that trade network externalities are a key determinant of anchor currencies in the international monetary system. Other factors found to be related to anchor currency choice include the symmetry of output co-movement, the currency denomination of debt, and legal or colonial origins.

Determinants of exchange rate regime switching

Exchange rate policy in many emerging markets shifts between a stronger and weaker commitment to peg. This observation raises the following questions, which we address in our paper: Does intervention policy exhibit switching? And if so, what causes policy to shift? The theoretical literature increasingly points to the critical importance of financial fundamentals (Chinn, M.D., Kletzer, K.M., 2001. Imperfect information, domestic regulation and financial crises. In: Glick, R., Moreno, R., Spiegel, M. (Eds.), Financial Crises in Emerging Markets. Cambridge University Press, Cambridge, pp. 196–237; Dooley, 2000; Chang, R., Velasco, A., 2005. Monetary policy and the currency denomination of debt: a tale of two equilibria. Kennedy School of Government Working Paper Series, Harvard University, Cambridge, Massachusetts; among others). Direct empirical validation to date is limited, however, although relevant intuitions come from duration and indicators literature (Kaminsky, G.L., Reinhart, C.M., Vegh, C.A., 2004. When it rains, it pours: procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual, National Bureau of Economic Research, Inc.; Domac, I., Peria, M.S., 2003. Banking crises and exchange rate regimes: is there a link? Journal of International Economics 61, 41–72; Tudela, M., 2004. Explaining currency crises: a duration model approach. Journal of International Money and Finance 23, 799–816). We use a panel of quarterly data starting 1985 through 2004 for 14 countries, mainly from Latin America and East Asia, and adopt a novel two-step empirical strategy. First, we apply regime switching methods to two simple indices of central bank exchange rate policy. This generates likelihoods of high and low intervention. In the second step, we establish the variables that determine these probabilities. We find strong evidence that the economy's balance sheet and economic performance determine the likelihood of switching in the exchange rate regime. Specifically, an increase in reserve currency debt relative to assets raises potential capital losses from devaluation and reduces the probability of switching to a low intervention regime, as does a decline in growth. The purpose here is not to present an alternative regime classification (Levy-Yeyati, E., Sturzenegger, S., 2005. Classifying exchange rate regimes: deeds vs. words. European Economic Review 49, 1603–1635; Reinhart, C.M., Rogoff, K., 2004. The modern history of exchange rate arrangements: a reinterpretation. Quarterly Journal of Economics, Available at: http://www.puaf.umd.edu/faculty/papers/reinhart/papers.htm), but to establish the relative importance of different constraints on the central bank, which has policy implications. The empirical approach and specification is flexible to whether intervention is discrete or gradual and to whether or not the central bank sterilizes.

Why do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice

Conditional on choosing a pegged exchange rate regime, what determines the currency to which countries peg or “anchor” their exchange rate? This paper aims to answer this question using a panel multinomial logit framework, covering more than 100 countries for the period 1980-1998. We find that trade network externalities are a key determinant of anchor currency choice, implying that there are multiple steady states for the distribution of anchor currencies in the international monetary system. Other factors found to be related to anchor currency choice include the symmetry of output co-movement, the currency denomination of debt, and legal or colonial origins.

Monetary Policy and the Currency Denomination of Debt: A Tale of Two Equilibria

Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary authority validates that expectation; the same happens if agents initially expect floating. We also show that a flexible exchange rate Pareto-dominates a fixed one. It follows that social welfare would rise if the monetary authority could precommit to floating.

Monetary Policy and the Currency Denomination of Debt: A Tale of Two Equilibria

Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary authority validates that expectation; the same happens if agents initially expect floating. We also show that a flexible exchange rate Pareto-dominates a fixed one. It follows that social welfare would rise if the monetary authority could precommit to floating.

The management of exchange‐rate risk: A case from the manufacturing industry

AbstractThis article looks into the management of exchange rate risk at a U.K.‐listed company. The focus is particularly on the firm's operating exchange risk, for which it uses a synthesis of three different risk management approaches. These include the use of long‐term financial hedging instruments, operational adjustments based on real options theory, and the currency denomination of debt. Practice at the case company is unique, in that the former approach has been considered inappropriate by the theoretical literature and the latter is seldom used to manage firms' real cash flow exposures. In general, it has important implications for multinationals, especially with reference to the use of operational adjustments and the currency denomination of debt. © 2004 Wiley Periodicals, Inc.

The management of translation exchange rate risk in multinational companies: A note

According to academics, the translation form of exchange rate risk does not affect the market value of a firm and as a result should not be managed by corporate managers. Research to date, however, suggests that many multinational companies (MNCs) actively monitor and manage their translation exchange risk. Thus, either corporate management fail to understand the irrelevant nature of this risk or there are other factors that need to be considered. This paper extends the current literature by examining these issues; in particular, it examines whether MNCs continue to manage their translation exchange rate risk and if so what their reasons are for the specific practices. Results suggest that the gearing ratio, itself a measure of risk, is largely responsible for the management of the translation process. Further, some companies seek to manage their ‘profit and loss translation exchange risk,’ a ‘risk’ resulting from the impact of the translation process on the profit and loss account. Preferred management strategies include the currency denomination of debt and use of financial instruments such as forward contracts. Capital market imperfections reflected in binding loan covenants, agency theory problems and the assumption of inefficient market behaviour explain the observed corporate management behaviour.

Hedging and Choice of Currency Denomination in International Syndicated Loan Markets

This paper examines the determinants of the currency denomination of debt decision of Australian and New Zealand firms and compares it with that of Asian firms around the 1997 Asian crisis. Unlike existing research, our model of currency choice controls for location choice, and includes firm and country specific determinants. The results show demand for hedging is the primary determinant of foreign currency borrowing by Australian and New Zealand firms. In Asian firms however, firm leverage, country political risk and interest rate differentials determine the currency denomination of debt. There is no support for the hedging hypothesis in Asian firms.

Currency denomination of debt: Lessons from rolls-royce and laker airways

S.L. Srinivasulu is an Associate Professor of Finance at Eastern Michigan University. He obta ined his Ph.D. in Internat ional Business f rom the Universi ty of Michigan. The author would like to thank Gunter Dufey of the Universi ty of Michigan for his helpful comments . Multinationals' decisions about financing their global operations can make or break the business. The wrong decision can lead to bankruptcy; the right decision can provide you with a hedge against difficult times. 19