Empirical Economics

, Volume 57, Issue 2, pp 449–473 | Cite as

Balance sheet and currency mismatch: evidence for Peruvian firms

  • N. R. Ramírez-RondánEmail author


In the Peruvian economy, as in other emerging economies, a significant portion of the debt held by firms is denominated in US dollars. While an exchange rate depreciation is likely to increase firm debt and influence investment and production plans, the literature finds weak or no evidence of this balance sheet effect. In this paper, I argue that this effect is observed in firms with a significant currency mismatch. I estimate the currency mismatch (defined as assets minus liabilities in US dollars and expressed as a percentage of total assets in domestic currency) from which the exchange rate has negative effects on firms’ investment. Using financial information from 74 non-financial Peruvian firms from 2002 to 2014, I find significant balance sheet effects for firms with a currency mismatch below − 10.4%.


Balance sheet Dollar debt Peru 



I would like to thank Guillermo Moloche, Renzo Castellares, Diego Winkelried, and the anonymous referee for valuable comments and suggestions. I also thank the participants of the Third Annual Conference of The Bilateral Assistance and Capacity Building for Central Banks Program in Geneva, Switzerland; the XXXIII Meeting of Economists of the Central Bank of Peru in Lima, Peru; the 20th Annual Meeting of the Latin American and Caribbean Economic Association in Santa Cruz, Bolivia; and the 2015 Annual Congress of the Peruvian Economic Association in Lima, Peru. I am grateful to Bryce Cruz, Yamily León, Nevenka Ciriaco and Andrea Vilchez for providing excellent research assistance. Special thanks to Patricia Paskov for kindly review the paper. All remaining errors are mine.


  1. Aghion P, Bacchetta P, Banerjee A (2001) Currency crises and monetary policy in an economy with credit constraints. Eur Econ Rev 45(7):1121–1150CrossRefGoogle Scholar
  2. Aivazian VA, Ge Y, Qiu J (2005) The impact of leverage on firm investment: Canadian evidence. J Corp Finance 11(1–2):277–291CrossRefGoogle Scholar
  3. Azabache P (2010) Decisiones de inversión en empresas con dolarización financiera: un modelo umbral del efecto hoja de balance. Consorcio de Investigación Económica y Social, LimaGoogle Scholar
  4. Baltagi BH, Kao C (2000) Nonstacionary paneles, cointegration in paneles and dynamic panels: a survey. In: Baltagi BH, Fomby BT, Hill RC (eds) Nonstationary panels, panel cointegration, and dynamic panels. Advances in Econometrics 15. Emerald Group Publishing Limited, Bingley, pp 7–51CrossRefGoogle Scholar
  5. Batini N, Levine P, Pearlman J (2007) Optimal exchange rate stabilization in a dollarized economy with inflation targets. Mimeo, London Metropolitan University, LondonGoogle Scholar
  6. Beck T, Demirguc-Kunt A, Laeven L, Levine R (2008) Finance, firm size, and growth. J Money Credit Bank 40(7):1379–1405CrossRefGoogle Scholar
  7. Berg A, Borensztein E (2000) The pros and cons of full dollarization. IMF Working Papers 00/50Google Scholar
  8. Bernanke B, Gertler M, Gilchrist S (1999) The Financial accelerator in a quantitative business cycle framework. In: Taylor M, Woodford M (eds) Handbook of macroeconomics 1, part C. Elsevier, North-Holland, pp 1341–1393CrossRefGoogle Scholar
  9. Bleakley H, Cowan K (2008) Corporate dollar debt and depreciations: much ado about nothing? Rev Econ Stat 90(4):612–626CrossRefGoogle Scholar
  10. Burstein A, Eichenbaum M, Rebelo S (2005) Large devaluations and the real exchange rate. J Polit Econ 113(4):742–784CrossRefGoogle Scholar
  11. Carranza L, Cayo JM, Galdon-Sanchez JE (2003) Exchange rate volatility and economic performance in Peru: a firm level analysis. Emerg Mark Rev 4(4):472–496CrossRefGoogle Scholar
  12. Carranza L, Galdon-Sanchez JE, Gomez-Biscarri J (2009) Exchange rate and inflation dynamics in dollarized economies. J Dev Econ 89(1):98–108CrossRefGoogle Scholar
  13. Carranza L, Galdon-Sanchez JE, Gomez-Biscarri J (2011) The relationship between investment and large exchange rate depreciations in dollarized economies. J Int Money Finance 30(7):1265–1279CrossRefGoogle Scholar
  14. Carrera C (2016) Identifying the exchange-rate balance sheet effect over firms. Working Paper 67, Peruvian Economic AssociationGoogle Scholar
  15. Chan KS (1993) Consistency and limiting distribution of the least squares estimator of a threshold autoregressive model. Ann Stat 21(1):520–533CrossRefGoogle Scholar
  16. Cespedes L, Chang R, Velasco A (2004) Balance-sheet and exchange rate policy. Am Econ Rev 94(4):1183–1193CrossRefGoogle Scholar
  17. Choi WG, Cook D (2004) Liability dollarization and the bank balance sheet channel. J Int Econ 64(2):247–275CrossRefGoogle Scholar
  18. Cowan K, Hansen E, Herrera LO (2005) Currency mismatches, balance sheet effects and hedging in Chilean non-financial corporations. Inter-American Development Bank working paper, p 521Google Scholar
  19. Financial Stability Report (2015) Financial stability report November 2015. Central Bank of PeruGoogle Scholar
  20. Fazzari SM, Hubbard RG, Petersen BC (1988) Financing constraints and corporate investment. Brook Pap Econ Act 1:141–206CrossRefGoogle Scholar
  21. Fazzari SM, Petersen BC (1993) Working capital and fixed investment: new evidence on financing constraints. RAND J Econ 24(3):328–342CrossRefGoogle Scholar
  22. Gala VD, Julio B (2016) Firm size and corporate investment. University of Pennsylvania, Mimeo, Wharton School, New YorkGoogle Scholar
  23. Galindo A, Panizza U, Schiantarelli F (2003) Debt composition and balance sheet effects of currency depreciation: a summary of the micro evidence. Emerg Mark Rev 4(4):330–339CrossRefGoogle Scholar
  24. Grazzi M, Jacoby N, Treibich T (2016) Dynamics of investment and firm performance: comparative evidence from manufacturing industries. Empir Econ 51(1):125–179CrossRefGoogle Scholar
  25. Hall BH, Kruiniger H (1995) The role of working capital in the investment process. University of California at Berkeley, Mimeo, New YorkGoogle Scholar
  26. Hansen BE (1996) Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica 64(2):413–430CrossRefGoogle Scholar
  27. Hansen BE (1999) Threshold effects in non-dynamic panels: estimation, testing and inference. J Econom 93(2):345–368CrossRefGoogle Scholar
  28. Hansen BE (2000) Sample splitting and threshold estimation. Econometrica 68(3):575–603CrossRefGoogle Scholar
  29. Harberger AC (1950) Currency depreciation, income and the balance of trade. J Polit Econ 58(1):47–60CrossRefGoogle Scholar
  30. Hsiao C, Pesaran M, Tahmiscioglu K (2002) Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods. J Econom 109(1):107–150CrossRefGoogle Scholar
  31. Ize A, Levy-Yeyati E (2006) Financial de-dollarization: is it for real? In: Armas A, Ize A, Levy-Yeyati E (eds) Financial dollarization. Palgrave Macmillan, London, pp 38–60CrossRefGoogle Scholar
  32. Jensen M (1986) Agency costs of free cash flow, corporate finance, and takeovers. Am Econ Rev 76(2):323–329Google Scholar
  33. Kadapakkam PR, Kumar PC, Riddick L (1998) The impact of cash flows and firm size on investment: the international evidence. J Bank Finance 22(3):293–320CrossRefGoogle Scholar
  34. Kaplan S, Zingales L (1997) Do investment cash flow sensitivities provide useful measures of financing constraints? Q J Econ 112(1):169–215CrossRefGoogle Scholar
  35. Krugman P (1999) Balance sheet, the transfer problem, and financial crises. Int Tax Public Finance 6(4):459–472CrossRefGoogle Scholar
  36. Kurshev A, Strebulaev IA (2015) Firm size and capital structure. Q J Finance 5(3):1–46CrossRefGoogle Scholar
  37. Lang L, Ofekb E, Stulz RM (1996) Leverage, investment, and firm growth. J Financ Econ 40(1):3–29CrossRefGoogle Scholar
  38. Laursen S, Metzler LA (1950) Flexible exchange rates and the theory of employment. Rev Econ Stat 32(4):281–299CrossRefGoogle Scholar
  39. Leiderman L, Maino R, Parrado E (2006) Inflation targeting in dollarized economies. In: Armas A, Ize A, Levy-Yeyati E (eds) Financial dollarization. Palgrave Macmillan, London, pp 99–114CrossRefGoogle Scholar
  40. Lewellen J, Lewellen K (2016) Investment and cash flow: new evidence. J Financ Quant Anal 51(4):1135–1164CrossRefGoogle Scholar
  41. Loveday J, Molina O, Rivas-Llosa R (2004) Mecanismos de transmisión de la política monetaria y el impacto de una devaluación en el nivel de las firmas. Rev Estud Econ 12:53–136Google Scholar
  42. Luengnaruemitchai P (2003) The Asian crisis and the mystery of the missing balance sheet effect. Mimeo, University of California, BerkeleyGoogle Scholar
  43. Magud N (2010) Currency mismatch, openness and exchange rate regime choice. J Macroecon 32(1):68–89CrossRefGoogle Scholar
  44. Orrego F, Gondo R (2016) Dedollarization and financial robustness. In: Yamada G, Winkelried D (eds) Política y estabilidad monetaria en el Perú. Universidad del Pacífico press, Lima, pp 177–208Google Scholar
  45. Whited T (1992) Debt, liquidity constraints, and corporate investment: evidence from panel data. J Finance 47(4):1425–1460CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsUniversidad del PacíficoLimaPeru

Personalised recommendations