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We provide evidence of a new channel through which exchange rates affect trade. Using a novel identification strategy that exploits firms’ maturity structure of foreign currency debt around a large depreciation in Colombia, we show that firms experiencing a stronger debt revaluation of dominant currency debt due to a home currency depreciation compress imports relatively more while exports are unaffected. Dominant currency financing does not lead to an import compression for firms that export, hold foreign currency assets, or are active in the foreign exchange derivatives markets, as they are all hedged against a revaluation of their debt. These findings can be rationalized through the prism of a model with costly state verification and foreign currency borrowing. Quantitatively, the dominant currency financing channel explains a significant part of the external adjustment process in addition to the expenditure switching channel. Pricing exports in the dominant currency, instead of the producer’s currency, mutes the effect of dominant currency financing on trade flows.

Banks and Banking --- Banks --- Capacity --- Capital and Ownership Structure --- Capital --- Currencies --- Currency crises --- Current Account Adjustment --- Depository Institutions --- Depreciation --- Economic & financial crises & disasters --- Economics of specific sectors --- Economics --- Economics: General --- Exports and Imports --- Exports --- Financial regulation and supervision --- Financial Risk and Risk Management --- Financial risk management --- Financial services law & regulation --- Financing Policy --- Foreign Exchange --- Goodwill --- Government and the Monetary System --- Hedging --- Imports --- Informal sector --- Intangible Capital --- International economics --- International Financial Markets --- International trade --- Investment --- Investments: General --- Macroeconomics --- Micro Finance Institutions --- Monetary economics --- Monetary Systems --- Money and Monetary Policy --- Money --- Mortgages --- National accounts --- Open Economy Macroeconomics --- Payment Systems --- Regimes --- Saving and investment --- Short-term Capital Movements --- Standards --- Trade: General --- Value of Firms