Foreign Currency Debt and Capital Flows in Emerging Markets
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This dissertation studies the determinants and consequences of capital inflows and foreign currency (FX) debt in emerging markets. Chapter 1 summarizes the topics, questions addressed, and findings. Chapter 2 studies the effects of balance sheet shocks driven by FX debt using a unique dataset of firm FX exposures matched with firm-bank lending data from listed firms in Mexico. I find that smaller non-exporters with FX mismatch see a decrease in loan growth, resulting in stagnant employment growth and decreased growth in physical capital relative to firms with less FX mismatch. Larger non-exporters with FX mismatch also have lower loan growth in FX following the shock, but are able to increase borrowing in Peso, resulting in higher growth in employment and physical capital relative to firms with less FX mismatch. My results imply that net worth based borrowing constraints are tighter for smaller firms and for loans in FX. I present a stylized model that rationalizes these findings. Chapter 3 examines how international capital flows into a country, that is by which sector capital flows in and out, and what drives those flows. To do so, we construct a new dataset of capital inflows and outflows split by sector. We establish four new stylized facts highlighting the differences in responses by sector to local and global shocks. These new facts are inconsistent with the standard models in which all foreign and domestic agents invest or disinvest in the same countries as a response to domestic and global shocks. Chapter 4 examines the link between the global financial cycle (proxied by the VIX) and the currency composition of lending by emerging market banks. I construct a country-panel dataset of lending shares in FX, and show that this moves positively with the VIX. Countries that are more open to capital inflows or have poorly capitalized banking systems, however, tend to lend more in FX when VIX is low. Using matched firm-bank data from Mexico, I find that the positive association of FX lending with global liquidity holds in the microdata, and that this relationship is driven by well-capitalized banks.