The exchange rate regime and the currency composition of corporate debt:: the Mexican experience

This paper analyzes the effect that the change from a fixed to a floating exchange rate regime that took place in Mexico in December 1994 had on the currency composition of corporate debt. In particular, the paper asks whether a fixed exchange rate regime biases corporate borrowing towards foreign currency due to an implicit exchange rate guarantee given by the government. Therefore, under a predetermined regime, firms will not fully internalize their exchange rate risk and will be more likely to engage in balance sheet mismatches than under a floating regime. We study the main determinants of foreign currency borrowing of those firms listed in the Mexican Stock Exchange from 1992 to 2000 to test whether balance sheet currency mismatches fell after the adoption of the floating exchange rate regime. The results found support the view that the floating exchange rate regime has been useful in reducing exchange rate exposure. (C) 2002 Elsevier Science B.V All rights reserved.