Research

This paper studies the heterogeneous hedging strategies of non-financial firms in emerging market economies against exchange rate uncertainty. We show that, although large firms are prevalent in the derivatives market, they hold smaller shares of covered Foreign Currency (FC) debt compared to smaller firms. We rationalize this pattern in two ways: i) The market for covered FC debt lacks liquidity due to the granularity of the economy and macroprudential policies on the FC exposures of banks, which limits the entry of small firms and the extent of large firms' hedges. ii) Sterilized Foreign Exchange (FX) interventions distort firms' use of covered FC debt. Moderate FX sales reduce hedge size and the probability of entry for small firms that are implicitly protected by the monetary authority, enabling them to bypass fixed entry costs. Large FX sales spill FC liquidity into the derivatives market, increasing the hedges of large firms as these interventions reduce their variable costs. We provide theoretical and empirical evidence for these two explanations using rich firm-level panel data for Colombia.

Draft.

We empirically disentangle the short vs medium-run effects of exchange rate movements, on the investment of non-financial firms in Colombia from 2005 to 2019. We find that a structural depreciation of the peso weights on investment through a balance-sheet effect for firms with Foreign Currency (FC) debt. Exports provide a natural hedge against exchange rate fluctuations but only in the short-run. FC forwards protect firms against surprise currency depreciations; nevertheless, they present a cost of opportunity in terms of real investment. We also find that in periods of a depreciated exchange rate, big firms financially hedge while export-oriented firms and foreign firms use natural hedging and their relationship with headquarters to protect themselves against exchange rate movements. We rationalize our findings with the international macro and micro-finance literature. 

Draft.

This paper studies how bank liability structure shapes monetary policy transmission in Latin America. Using bank-level data for 2005-2023 we estimate expense betas, the sensitivity of funding costs to policy rates, as a measure of deposit franchise strength. Bank-level estimates yield average betas of about 10%. In a regional panel, controlling for macroeconomic conditions and policy regimes raises the estimated beta to 27%, consistent with attenuation bias in simpler specifications. Even after accounting for these factors, pass-through remains below the 35%–40% observed in the United States and Europe. We identify two key mechanisms: foreign currency deposits weaken transmission above 40% of deposits, pass-through becomes statistically indistinguishable from zero; while inflation-targeting regimes strengthen it. At the bank level, overhead costs proxy for franchise intensity; instrumental variables estimates show that stronger franchises reduce pass-through rather than operating through scale. 

Draft.