Firm dollar debt and central bank dollar reserves: Empirical evidence from Latin America

Show simple item record

dc.contributor.author Sengupta, Rajeswari
dc.date.accessioned 2015-08-10T13:26:32Z
dc.date.available 2015-08-10T13:26:32Z
dc.date.issued 2014-04
dc.identifier.uri http://hdl.handle.net/2275/313
dc.description.abstract I explore an empirically robust but previously undocumented association between the foreign exchange reserves accumulated by central banks of emerging market economies and dollar-denominated debt held in the balance sheets of non financial sector firms. Borrowing in dollars can have damaging effects on corporate balance sheets in the event of exchange rate depreciation. However, firms may discount such risk because of the implicit insurance provided by the central banks ex-ante reserve accumulation: in the event of a currency depreciation, firms may expect the central bank to stabilize the exchange rate using its stock of reserves. Using a novel firm-level balance sheet database, I investigate this possibility for close to 1500 firms in six of the largest Latin American economies, Argentina, Brazil, Chile, Colombia, Mexico and Peru. Results suggest that over the sample period, 1995-2007, an increase in the level of reserves is statistically and economically associated with an increase in the dollar borrowing of non financial sector firms of these economies. This could hint at a possible paradox: a higher level of reserves need not necessarily signify an economy that is more resilient to shocks. While reserve accumulation enables governments to weather macroeconomic risks arising from sudden stops in international capital flows, it can also increase the vulnerability of the corporate sector to currency risks by distorting incentives. Thus central banks, while formulating their foreign exchange intervention policies, may need to take into consideration the impact of the resultant reserve stockpiling on the private sector. en_US
dc.language.iso en en_US
dc.relation.ispartofseries WP;WP-2014-013
dc.subject Foreign exchange reserves en_US
dc.subject foreign currency denominated debt en_US
dc.subject exchange rate regimes en_US
dc.subject currency crisis en_US
dc.title Firm dollar debt and central bank dollar reserves: Empirical evidence from Latin America en_US
dc.type Working Paper en_US

Files in this item

This item appears in the following Collection(s)

Show simple item record

Search DSpace

Advanced Search


My Account