Balance sheet effects of foreign currency debt and real exchange rate on corporate investment: evidence from Turkey

Abstract

I analyze the balance sheet channels of depreciation of the Turkish non-financial corporations for 2003–2015. Having constructed a novel, hand-collected firm-level dataset on the composition and term structure of foreign currency assets and liabilities, I show that foreign currency debt and mismatch has a significant negative balance sheet effect on capital investment following a depreciation. The results remain same even after controlling for foreign currency assets and exports. This implies that the contractionary net worth effect of depreciation dominates its expansionary competitiveness effect. The result is more pronounced for the firms with short-term foreign currency exposures.