Exchange Rate Fluctuations and Firm Leverage
Ilhyock Shim, ¸S ebnem Kalemli-Özcan, Xiaoxi Liu
,
1
(
69
)
IMF Economic Review
90-121
February
2021
Abstract
We quantify the effect of exchange rate fluctuations on firm leverage. When home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency debt. These firms can borrow more as a result and increase their leverage. When home currency depreciates, the reverse happens as firms have to de-lever with a negative shock to their balance sheets.