Operational currency mismatch

Description

This paper examines the determinants and effects of exchange rate exposure using data on 500 Indian firms over the period 1995–2011. Unlike existing studies in the literature, we employ a measure of operational currency exposure based on firms’ foreign currency revenues and costs. Among other factors, exchange rate volatility emerges as a significant determinant of average firm-level exposure, with the direction of the relationship supporting the presence of moral hazard in firms’ risk-taking behavior. Furthermore, high levels of operational exposure are associated with significantly lower output growth, profitability, and capital expenditure during episodes of substantial currency depreciation at the firm level. Taken together, these findings suggest that policymakers should account for the incentive effects of their interventions in foreign exchange markets.

Publication Date

1-1-2013

Keywords

Operational currency exposure, Moral hazard, Exchange rate volatility

Conference

17th International Conference on Macroeconomic Analysis and International Finance, 28-30 May, 2013, Rethymno, University of Crete, Greece

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