Short vs Medium-Run: Exchange Rate Movements, Investment and the Currency Composition of Balance Sheets

<jats:p>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 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.</jats:p>