Corporate Dollar Debt and Global Trades

Abstract

This paper investigates the role of dollar debt and firm heterogeneity in shaping the exchange rate pass-through to global trades. With a unique dataset that merges extensive firm-level balance sheet information with transaction-level Korean customs data, we find that firms with greater exposure to foreign currency debt tend to decrease their export quantities and increase their export prices following the devaluation at the end of 1997, particularly pronounced for smaller firms. On the other hand, larger exporters increase their export quantities and lower their export prices as they are more indebted in foreign currency. The heterogeneous price and quantity responses across firm size potentially arise from large firms, indebted in foreign currency, not facing the disruption in their production as much as smaller firms. On top of that, larger firms may increase their exports to generate more cashflows when they are more indebted in foreign currency as their production capacity is not restricted after the devaluation. We also find that exporters, indebted in foreign currency, reduce their sales to domestic markets more than domestic firms, especially when exporters are small facing tighter financial constraints. The panel data analysis from 2001-2020 confirms the relevance of the financial channel of dollar debt in the exchange rate pass-through to export prices and quantities in more recent periods.