IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/31183.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • 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
    Note: CF IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w31183.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. José María Serena & Ricardo Sousa, 2017. "Does exchange rate depreciation have contractionary effects on firm-level investment?," BIS Working Papers 624, Bank for International Settlements.
    2. Martin Brown & Karolin Kirschenmann & Steven Ongena, 2014. "Bank Funding, Securitization, and Loan Terms: Evidence from Foreign Currency Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1501-1534, October.
    3. Bonomo, Marco & Martins, Betina & Pinto, Rodrigo, 2003. "Debt composition and exchange rate balance sheet effect in Brazil: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 368-396, December.
    4. Xavier Gabaix & Matteo Maggiori, 2015. "International Liquidity and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(3), pages 1369-1420.
    5. repec:idb:brikps:6417 is not listed on IDEAS
    6. Matthew D. Hill & Gary W. Kelly & Lorenzo A. Preve & Virginia Sarria-Allende, 2017. "Trade Credit or Financial Credit? An International Study of the Choice and Its Influences," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(10), pages 2318-2332, October.
    7. Sebnem Kalemli-Ozcan & Herman Kamil & Carolina Villegas-Sanchez, 2016. "What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 756-769, October.
    8. Hoyt Bleakley & Kevin Cowan, 2008. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 612-626, November.
    9. Julian di Giovanni & Şebnem Kalemli-Özcan & Mehmet Fatih Ulu & Yusuf Soner Baskaya, 2022. "International Spillovers and Local Credit Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(2), pages 733-773.
    10. Kevin Cowan & Erwin Hansen & Luis Oscar Herrera, 2005. "Currency Mismatches, Balance-Sheet Effects and Hedging in Chilean Non-Financial Corporations," Research Department Publications 4387, Inter-American Development Bank, Research Department.
    11. Mariassunta Giannetti & Nicolas Serrano-Velarde & Emanuele Tarantino, 2021. "Cheap Trade Credit and Competition in Downstream Markets," Journal of Political Economy, University of Chicago Press, vol. 129(6), pages 1744-1796.
    12. Portes, Richard & Huang, Yi & Panizza, Ugo, 2018. "Corporate foreign bond issuance and interfirm loans in China," CEPR Discussion Papers 12865, C.E.P.R. Discussion Papers.
    13. Gita Gopinath & Jeremy C Stein, 2021. "Banking, Trade, and the Making of a Dominant Currency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 783-830.
    14. McBrady, Matthew R. & Schill, Michael J., 2007. "Foreign currency-denominated borrowing in the absence of operating incentives," Journal of Financial Economics, Elsevier, vol. 86(1), pages 145-177, October.
    15. Martin Brown & Steven Ongena & Pinar Yeşin, 2014. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(1), pages 110-131, March.
    16. Mr. Christoph B. Rosenberg & Marcel Tirpák, 2008. "Determinants of Foreign Currency Borrowing in the New Member States of the EU," IMF Working Papers 2008/173, International Monetary Fund.
    17. Powell, Andrew & Panizza, Ugo & Caballero, Julián, 2015. "The second wave of global liquidity: Why are firms acting like financial intermediaries?," CEPR Discussion Papers 10926, C.E.P.R. Discussion Papers.
    18. Jae Sim & Simon Gilchrist, 2007. "Investment during the Korean financial crisis: A structural econometric approach," 2007 Meeting Papers 53, Society for Economic Dynamics.
    19. Martin Eichenbaum & Craig Burnside & Sergio Rebelo, 2007. "The Returns to Currency Speculation in Emerging Markets," American Economic Review, American Economic Association, vol. 97(2), pages 333-338, May.
    20. Valentina Bruno & Hyun Song Shin, 2020. "Currency Depreciation and Emerging Market Corporate Distress," Management Science, INFORMS, vol. 66(5), pages 1935-1961, May.
    21. Kim, Yun Jung & Tesar, Linda L. & Zhang, Jing, 2015. "The impact of foreign liabilities on small firms: Firm-level evidence from the Korean crisis," Journal of International Economics, Elsevier, vol. 97(2), pages 209-230.
    22. Roberto Alvarez & Erwin Hansen, 2017. "Corporate Currency Risk and Hedging in Chile: Real and Financial Effects," IDB Publications (Working Papers) 97976, Inter-American Development Bank.
    23. Juliana Salomao & Liliana Varela, 2022. "Exchange Rate Exposure and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 481-514.
    24. Alvarez, Roberto & Hansen, Erwin, 2017. "Corporate Currency Risk and Hedging in Chile: Real and Financial Effects," IDB Publications (Working Papers) 8191, Inter-American Development Bank.
    25. Tarek A. Hassan, 2013. "Country Size, Currency Unions, and International Asset Returns," Journal of Finance, American Finance Association, vol. 68(6), pages 2269-2308, December.
    26. Alan Finkelstein Shapiro & Andres Gonzalez Gomez & Jessica Roldan-Pena & Victoria Nuguer, 2018. "Price Dynamics and the Financing Structure of Firms in Emerging Economies," 2018 Meeting Papers 339, Society for Economic Dynamics.
    27. Gaston Gelos, R., 2003. "Foreign currency debt in emerging markets: firm-level evidence from Mexico," Economics Letters, Elsevier, vol. 78(3), pages 323-327, March.
    28. Wenxin Du & Alexander Tepper & Adrien Verdelhan, 2018. "Deviations from Covered Interest Rate Parity," Journal of Finance, American Finance Association, vol. 73(3), pages 915-957, June.
    29. Stephen Gilmore & Fumio Hayashi, 2011. "Emerging Market Currency Excess Returns," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 85-111, October.
    30. Valentina Bruno & Hyun Song Shin, 2017. "Global Dollar Credit and Carry Trades: A Firm-Level Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 30(3), pages 703-749.
    31. Leora Klapper & Luc Laeven & Raghuram Rajan, 2012. "Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 838-867.
    32. Andrew Powell, 2014. "Global Recovery and Monetary Normalization: Escaping a Chronicle Foretold?," IDB Publications (Books), Inter-American Development Bank, number 84515, February.
    33. Michael Chui & Emese Kuruc & Philip Turner, 2016. "A new dimension to currency mismatches in the emerging markets - non-financial companies," BIS Working Papers 550, Bank for International Settlements.
    34. Ongena, Steven & Schindele, Ibolya & Vonnák, Dzsamila, 2021. "In lands of foreign currency credit, bank lending channels run through?," Journal of International Economics, Elsevier, vol. 129(C).
    35. Pratap, Sangeeta & Lobato, Ignacio & Somuano, Alejandro, 2003. "Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 450-471, December.
    36. Hardy, Bryan, 2023. "Foreign currency borrowing, balance sheet shocks, and real outcomes," Journal of International Money and Finance, Elsevier, vol. 139(C).
    37. Valentina Bruno & Se-Jik Kim & Hyun Shin, 2018. "Exchange Rates and the Working Capital Channel of Trade Fluctuations," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 531-536, May.
    38. Simon Gilchrist & Jae W. Sim, 2007. "Investment during the Korean Financial Crisis: A Structural Econometric Analysis," NBER Working Papers 13315, National Bureau of Economic Research, Inc.
    39. Benavente, Jose Miguel & Johnson, Christian A. & Morande, Felipe G., 2003. "Debt composition and balance sheet effects of exchange rate depreciations: a firm-level analysis for Chile," Emerging Markets Review, Elsevier, vol. 4(4), pages 397-416, December.
    40. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, vol. 78(1), pages 95-113, October.
    41. Avdjiev, Stefan & Koch, Cathérine & McGuire, Patrick & von Peter, Goetz, 2018. "Transmission of monetary policy through global banks: Whose policy matters?," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 67-82.
    42. Powell, Andrew, 2014. "Global Recovery and Monetary Normalization: Escaping a Chronicle Foretold?," IDB Publications (Books), Inter-American Development Bank, number 6417, November.
    43. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2011. "Financial dollarization: The role of foreign-owned banks and interest rates," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 794-806, April.
    44. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    45. Kevin Cowan & Erwin Hansen & Luis Óscar Herrera, 2006. "Currency Mismatches in Chilean Nonfinancial Corporations," Central Banking, Analysis, and Economic Policies Book Series, in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus Sc (ed.),External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 7, pages 207-252, Central Bank of Chile.
    46. Brown, Martin & Ongena, Steven & Yesin, Pinar, 2011. "Foreign currency borrowing by small firms in the transition economies," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 285-302, July.
    47. Wenxin Du & Jesse Schreger, 2016. "Sovereign Risk, Currency Risk, and Corporate Balance Sheets," Harvard Business School Working Papers 17-024, Harvard Business School.
    48. Giannetti, Mariassunta & Serrano-Velarde, Nicolas & Tarantino, Emanuele, 2018. "Cheap Trade Credit and Competition in Downstream Markets," CEPR Discussion Papers 13228, C.E.P.R. Discussion Papers.
    49. Sangeeta Pratap & Alejandro Somuano, "undated". "Debt Composition and Balance Sheet Effect of Exchange and Interest Rate Volatility in Mexico," DCBSLA Series 4, Inter-American Development Bank, Research Department.
    50. Raoul Minetti & Pierluigi Murro & Zeno Rotondi & Susan Chun Zhu, 2019. "Financial Constraints, Firms’ Supply Chains, and Internationalization," Journal of the European Economic Association, European Economic Association, vol. 17(2), pages 327-375.
    51. Robert Neil McCauley & Patrick McGuire & Vladyslav Sushko, 2015. "Dollar credit to emerging market economies," BIS Quarterly Review, Bank for International Settlements, December.
    52. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 858-869, May.
    53. Gita Gopinath & Jeremy C Stein, 0. "Banking, Trade, and the Making of a Dominant Currency," The Quarterly Journal of Economics, Oxford University Press, vol. 136(2), pages 783-830.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goyal, Ashima & Verma, Akhilesh K, 2023. "Cross border flows, financial intermediation and interactions of policy rules in a small open economy," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 369-393.
    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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hardy, Bryan, 2023. "Foreign currency borrowing, balance sheet shocks, and real outcomes," Journal of International Money and Finance, Elsevier, vol. 139(C).
    2. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2022. "Foreign currency loans and credit risk: Evidence from U.S. banks," Journal of International Economics, Elsevier, vol. 135(C).
    3. Caballero, Julián, 2021. "Corporate dollar debt and depreciations: All’s well that ends well?," Journal of Banking & Finance, Elsevier, vol. 130(C).
    4. José Antonio Morales Castro & Francisco López-Herrera, 2021. "Ganancias cambiarias en empresas mexicanas y variables fundamentales y económicas," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(2), pages 1-21, Abril - J.
    5. José Antonio Morales Castro & Francisco López-Herrera, 2021. "Ganancias cambiarias en empresas mexicanas y variables fundamentales y económicas," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(2), pages 1-21, Abril - J.
    6. Harasztosi, Péter & Kátay, Gábor, 2020. "Currency matching by non-financial corporations," Journal of Banking & Finance, Elsevier, vol. 113(C).
    7. Minsuk Kim, 2019. "Financial Development, Exchange Rate Fluctuations and Debt Dollarization: A Firm-Level Evidence," IMF Working Papers 2019/168, International Monetary Fund.
    8. Marina Tkalec & Miroslav Verbič, 2013. "A new look into the prevalence of balance sheet or competitiveness effect of exchange rate depreciation in a highly euroised economy," Post-Communist Economies, Taylor & Francis Journals, vol. 25(2), pages 225-240, June.
    9. Juliana Salomao & Liliana Varela, 2022. "Exchange Rate Exposure and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 481-514.
    10. Endrész, Marianna & Harasztosi, Péter, 2014. "Corporate foreign currency borrowing and investment: The case of Hungary," Emerging Markets Review, Elsevier, vol. 21(C), pages 265-287.
    11. Kim, Yun Jung, 2016. "Foreign currency exposure and balance sheet effects: A firm-level analysis for Korea," Emerging Markets Review, Elsevier, vol. 26(C), pages 64-79.
    12. Kátay, Gábor & Péter, Harasztosi, 2017. "Currency Matching and Carry Trade by Non-Financial Corporations," Working Papers 2017-02, Joint Research Centre, European Commission.
    13. Valentina Bruno & Hyun Song Shin, 2020. "Currency Depreciation and Emerging Market Corporate Distress," Management Science, INFORMS, vol. 66(5), pages 1935-1961, May.
    14. Kim, Yun Jung & Tesar, Linda L. & Zhang, Jing, 2015. "The impact of foreign liabilities on small firms: Firm-level evidence from the Korean crisis," Journal of International Economics, Elsevier, vol. 97(2), pages 209-230.
    15. Sung C. Bae & Hyeon Sook Kim & Taek Ho Kwon, 2020. "Foreign currency borrowing surrounding the global financial crisis: Evidence from Korea," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 786-817, May.
    16. Maria Paula Vieira Cicogna & Rudinei Toneto Jr & Mauricio Ribeiro do Valle & Wilson Tarantin Junior, 2021. "The Predominance of Balance Sheet Effect versus Competitiveness Effect of Exchange Rate on Brazilian Companies," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(12), pages 107-107, December.
    17. Emil Verner & Győző Gyöngyösi, 2020. "Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis," American Economic Review, American Economic Association, vol. 110(9), pages 2667-2702, September.
    18. Kohn, David & Leibovici, Fernando & Szkup, Michal, 2020. "Financial frictions and export dynamics in large devaluations," Journal of International Economics, Elsevier, vol. 122(C).
    19. Ongena, Steven & Brown, Martin & Yeşin, Pınar, 2009. "Foreign Currency Borrowing by Small Firms," CEPR Discussion Papers 7540, C.E.P.R. Discussion Papers.
    20. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.

    More about this item

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:31183. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.