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From Carry Trades to Trade Credit: Financial Intermediation by Non-Financial Corporations

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  • Bryan Hardy
  • Felipe Saffie

Abstract

We use unique firm-level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency (FX) and lending in domestic currency, largely in the form of trade credit, accumulating currency risk in the process. We show at a quarterly frequency that the practice of borrowing in FX and extending trade credit is more prevalent when foreign currency borrowing is relatively cheaper than local currency borrowing, and it is associated with expansions in both gross trade credit and sales. Firms that were more active in carry-trades, accumulating currency risk, experienced larger reductions in investment and profits following a large depreciation event. Nevertheless, their extension of trade credit remained stable, insulating their trading partners from the shock. A firm-level panel for 20 emerging countries provide external validity for the link between carry trades and trade credit.

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  • Bryan Hardy & Felipe Saffie, 2023. "From Carry Trades to Trade Credit: Financial Intermediation by Non-Financial Corporations," NBER Working Papers 31183, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31183
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    2. Esposito, Federico & Hassan, Fadi, 2023. "Import competition, trade credit and financial frictions in general equilibrium," LSE Research Online Documents on Economics 121378, London School of Economics and Political Science, LSE Library.
    3. Hardy, Bryan, 2023. "Foreign currency borrowing, balance sheet shocks, and real outcomes," Journal of International Money and Finance, Elsevier, vol. 139(C).
    4. Esposito, Federico & Hassan, Fadi, 2023. "Import Competition, Trade Credit, and Financial Frictions in General Equilibrium," CEPR Discussion Papers 17926, C.E.P.R. Discussion Papers.
    5. Abraham,Facundo & Cortina Lorente,Juan Jose & Schmukler,Sergio L., 2020. "Growth of Global Corporate Debt : Main Facts and Policy Challenges," Policy Research Working Paper Series 9394, The World Bank.
    6. Shugo Yamamoto, 2020. "Global Liquidity,Offshore Bond Issuance and Shadow Banking in China," Discussion Papers 2011, Graduate School of Economics, Kobe University.
    7. Annina Kaltenbrunner & Elif Karaçimen & Joel Rabinovich, 2023. "The changing financial practises of Brazilian and Turkish firms under financial subordination, a mixed-methods analysis," Working Papers PKWP2306, Post Keynesian Economics Society (PKES).

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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