{
  "title": "Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence",
  "publication": "IMF Working Papers, August 2, 2019",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2019/08/02/financial-development-exchange-rate-fluctuations-and-debt-dollarization-a-firm-level-evidence-48530",
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  "summary": "This paper examines how financial development influences the debt dollarization of nonfinancial firms in a sample of emerging market economies (EMEs).",
  "sections": [
    {
      "heading": "Objective and analytical approach",
      "content": "- Examines how financial development influences the debt dollarization of nonfinancial firms in a sample of emerging market economies (EMEs).\n- Macroeconomic channels are identified from an optimal portfolio allocation model.\n- Channels are assessed empirically using accounting information of nonfinancial firms from 21 EMEs during 2009–2017.\n- Financial development is measured by the private credit-to-GDP ratio."
    },
    {
      "heading": "Key empirical findings",
      "content": "- Financial development, measured by the private credit-to-GDP ratio, mainly reduces the influence of exchange rate volatility in determining a firm's debt currency composition.\n- The effect of exchange rate volatility becomes statistically insignificant beyond an estimated threshold credit-to-GDP ratio of 100 percent.\n- Sample coverage: 21 EMEs; sample period: 2009–2017."
    },
    {
      "heading": "Mechanisms and channels identified",
      "content": "- The study links macroeconomic channels from an optimal portfolio allocation model to firm-level debt currency choices.\n- Financial development operates through multiple channels, with the dominant documented channel being the attenuation of exchange rate volatility’s influence on debt currency composition."
    },
    {
      "heading": "Policy implications (inferred from findings)",
      "content": "- Strengthening financial development (as captured by higher private credit-to-GDP ratios) can reduce firms’ sensitivity to exchange rate volatility when choosing debt currency, potentially lowering balance-sheet currency mismatch risks.\n- Achieving a private credit-to-GDP ratio at or above the estimated threshold of 100 percent is associated with exchange rate volatility becoming statistically insignificant in influencing debt currency composition, suggesting a policy target to mitigate debt dollarization risks.\n\nSource: IMF Working Paper \"Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence\" by Minsuk Kim, August 2, 2019.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2019/08/02/financial-development-exchange-rate-fluctuations-and-debt-dollarization-a-firm-level-evidence-48530"
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    "Authors: Minsuk Kim",
    "Published: August 2, 2019",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513508979.001",
    "Examines how financial development influences the debt dollarization of nonfinancial firms in a sample of emerging market economies (EMEs).",
    "Macroeconomic channels are identified from an optimal portfolio allocation model.",
    "Channels are assessed empirically using accounting information of nonfinancial firms from 21 EMEs during 2009–2017.",
    "Financial development is measured by the private credit-to-GDP ratio.",
    "Financial development, measured by the private credit-to-GDP ratio, mainly reduces the influence of exchange rate volatility in determining a firm's debt currency composition.",
    "The effect of exchange rate volatility becomes statistically insignificant beyond an estimated threshold credit-to-GDP ratio of 100 percent.",
    "Sample coverage: 21 EMEs; sample period: 2009–2017.",
    "The study links macroeconomic channels from an optimal portfolio allocation model to firm-level debt currency choices.",
    "Financial development operates through multiple channels, with the dominant documented channel being the attenuation of exchange rate volatility’s influence on debt currency composition.",
    "Strengthening financial development (as captured by higher private credit-to-GDP ratios) can reduce firms’ sensitivity to exchange rate volatility when choosing debt currency, potentially lowering balance-sheet currency mismatch risks.",
    "Achieving a private credit-to-GDP ratio at or above the estimated threshold of 100 percent is associated with exchange rate volatility becoming statistically insignificant in influencing debt currency composition, suggesting a policy target to mitigate debt dollarization risks.",
    "**Working Paper**"
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