Investment and exposure to exchange rate changes in Colombia

"We assemble a large data base of Colombian medium - large firms covering the 1997-2008 period and study different channels through which real exchange rate (RER) changes affect firm investment and profits. With regard to investment, (i) there are adjustment costs, presumably related to capital market imperfections, (ii) investment increases with liquidity as firms face restricted access to external financing, (iii) RER changes have no direct effect on investment, even after controlling for the effects of each sector, (iv) we find no evidence of a differential effect of RER changes on investment depending on exposure to foreign debt. This might be because few firms carry foreign debt or because those that do avoid currency mismatches through "natural" hedging or use financial instruments to hedge exchange rate risk."