Local Currency Borrowing Constraints and Firm Behavior: Evidence from an Emerging Market

We analyze the financial and real effects of a 2022 Turkish regulation that restricts new local currency lending to firms whose asset dollarization exceeds specified thresholds. Using novel administrative data from January 2021–December 2023 and a difference-in-differences approach combined with propensity score matching, we find a medium-term decline in local currency borrowing among affected firms with a stronger impact for credit-constrained firms. We also document spillover effects, as firms substitute local currency loans with foreign currency loans, Turkish lira trade credit, and internal foreign currency liquidity. Extended analysis indicates that employment growth and net exports of affected firms declined, while operational volatility increased.