Eric Girardin: eric.girardin[at]univ-amu.fr
Christelle Lecourt: christelle.lecourt[at]univ-amu.fr
This paper asks how the exchange rate affects corporate investment. Acting via a "financial channel", movements in the exchange rate influence domestic financial conditions by strengthening or weakening the balance sheets of domestic borrowers and foreign lenders. These effects arise from currency mismatches on balance sheets, or more generally through risk premia as global investors adjust their portfolios. Through this financial channel, a weakening of the exchange rate would be associated with a tightening of financial conditions, dampening economic activity. This contrasts with the traditional trade channel, where a fall in the exchange rate tends to have expansionary economic effects.