scholarly journals Destabilizing Stability? Exchange Rate Arrangements and Foreign Currency Debt

2020 ◽  
Vol 20 (173) ◽  
Author(s):  
Balazs Csonto ◽  
Tryggvi Gudmundsson
Keyword(s):  
Exchange Rate ◽  
Risk Taking ◽  
Financial Stability ◽  
Foreign Currency ◽  
Exchange Rate Flexibility ◽  
Macroprudential Policies ◽  
Increase Risk ◽  
Exchange Rate Arrangements ◽  
Stability Issues ◽  
Foreign Currency Debt

Emerging markets (EMs) often respond to shocks by intervening in foreign exchange (FX) markets and thus preventing full exchange rate adjustment. This response can serve to dampen the effect of shocks and increase monetary policy space but may also incentivize economic participants to increase risk taking and take on more FX debt. This paper empirically analyzes the role of exchange rate flexibility in affecting such risk taking, by using rolling correlations and difference-in-difference estimations. The results suggest that a shift towards greater exchange rate flexibility often coincides with a decline in external FX debt. The findings also highlight the importance of using complementary policies to deal with financial stability issues related to the exchange rate, such as FX-specific macroprudential policies and policies aimed at promoting financial development.

Real Exchange Rate Overvaluation and WTO Dispute Initiation in Developing Countries

2016 ◽  
Vol 70 (4) ◽  
pp. 797-821 ◽  
Author(s):  
Timm Betz ◽  
Andrew Kerner
Keyword(s):  
Developing Countries ◽  
Exchange Rate ◽  
Trade Policy ◽  
Foreign Currency ◽  
Real Exchange Rates ◽  
Trade Disputes ◽  
Trade Dispute ◽  
Competitive Disadvantage ◽  
Dispute Initiation ◽  
Foreign Currency Debt

AbstractWhy and when do developing countries file trade disputes at the World Trade Organization (WTO)? Although financial conditions have long been considered an important driver of trade policy, they have been largely absent from the literature on trade disputes. We argue that developing country governments bring more trade dispute to the WTO when overvalued real exchange rates put exporters at a competitive disadvantage. This dynamic is most prevalent in countries where large foreign currency debt burdens discourage nominal currency devaluations that would otherwise serve exporters’ interests. Our findings provide an explanation for differences in dispute participation rates among developing countries, and also suggest a new link between exchange rate regimes and trade policy.

The Effects of Macroprudential Policies on Financial Stability in Developing Countries

2019 ◽  
pp. 92-114
Author(s):  
Sümeyra Gazel
Keyword(s):  
Developing Countries ◽  
Exchange Rate ◽  
Current Account ◽  
Financial Stability ◽  
Current Account Deficit ◽  
Common Factor ◽  
Policy Instruments ◽  
Credit Growth ◽  
Macroprudential Policies ◽  
The Current Account

In this chapter, the concept of financial instability is examined in terms of the policy instruments used by central banks. Although the policy instruments used in each country differ according to the country conditions, it is thought that the common factor among developing countries with a current account deficit problem is exchange rate volatility resulting from excessive credit growth and short-term capital movements. In this context, Argentina, Brazil, Chile, Colombia, Hungary, Indonesia, India, Mexico, Poland, South Africa, and Turkey are examined with regard to the effects of macroprudential policies on financial stability for the period between Q2 of 2006 and Q2 of 2017 by using the time-varying panel causality test developed by Dumitrescu and Hurlin. The results of the analysis indicate that excessive credit growth is a cause of the current account deficit. The same findings are also valid for interest rate. There is no obvious link between the exchange rate and the current account deficit.

scholarly journals The Predominance of Balance Sheet Effect versus Competitiveness Effect of Exchange Rate on Brazilian Companies

2020 ◽  
Vol 12 (12) ◽  
pp. 107
Author(s):  
Maria Paula Vieira Cicogna ◽  
Rudinei Toneto Jr ◽  
Mauricio Ribeiro do Valle ◽  
Wilson Tarantin Junior
Keyword(s):  
Exchange Rate ◽  
Foreign Currency ◽  
Balance Sheet ◽  
International Market ◽  
Descriptive Statistics ◽  
Negative Effect ◽  
The Exchange Rate ◽  
Econometric Tests ◽  
Foreign Currency Debt ◽  
Exchange Rate Depreciation

The present research argues that the depreciation of the exchange rate has a negative effect on the balance sheet of Brazilian companies with debt in foreign currency. This effect is mainly on commodity exporters, since it is the class of companies with the highest indebtedness in the international market, as showed by the results. At the same time, companies with foreign currency debt showed a reduction in their investments in moments of depreciation of the exchange rate, which indicates the predominance of the balance sheet effect. The conclusions of the study were obtained through descriptive statistics and econometric tests (panel data) to analyze the effect of foreign currency debt and the exchange rate on investment rate. It was verified that the balance sheet effect generated by the exchange rate depreciation is predominant when compared to the competitiveness effect from 2003 to 2015.

scholarly journals Macroprudential Policy and Financial Stability: The Turkish Case

2018 ◽  
Vol 10 (2) ◽  
pp. 34
Author(s):  
Ilyas Siklar ◽  
Aysegül Akça
Keyword(s):  
Financial Stability ◽  
Banking Sector ◽  
Foreign Currency ◽  
Banking System ◽  
Policy Instrument ◽  
Money Market ◽  
Estimation Model ◽  
Macroprudential Policy ◽  
Leverage Ratio ◽  
Macroprudential Policies

This study aims to analyse the relationship between financial stability and macroprudential policies in Turkey and investigate the effectiveness of macroprudential policies on the financial stability by using the vector error correction model (VECM). Estimates are realized for the 2010-2017 period by using the monthly data. For this purpose, a composite financial stability indicator (FSI) is formed and an estimation model is developed. Banking sector credit concentration, net position of interbank money market, leverage ratio, capital buffers, reserve requirements and foreign currency loan limits are used as macroprudential policy indicators. According the results obtained from VECM model, the ratios which represent concentration of credit and capital buffer provide a favourable contribution to financial stability while the variables representing the leverage ratio and the net position of banking system in interbank money market negatively affect the financial stability. The study concludes that monetary policy should be supported by macroprudential policy instrument to achieve financial stability.

Intervention Strategies in Foreign Exchange Market

2020 ◽  
Vol 58 (3) ◽  
pp. 381-399
Author(s):  
Vesna Martin
Keyword(s):  
Exchange Rate ◽  
Foreign Exchange ◽  
Financial Stability ◽  
Foreign Exchange Market ◽  
Foreign Currency ◽  
Supply And Demand ◽  
Central Banks ◽  
Intervention Strategies ◽  
Exchange Market ◽  
The Impact

Abstract The goal of the paper is to present the intervention strategies used by central banks in order to influence the value of the domestic currency, transparency versus discretion when it comes to publishing data about FX intervention and the cost and effectiveness of intervention. It is rarely that nowadays countries allow for an exchange rate to be formed on the market basis through the effects of supply and demand for foreign exchange on the foreign exchange market. The central bank buys or sells a foreign currency in the foreign exchange market in order to increase or decrease the value of its national currency in comparison to the foreign currency. The reasons for the intervention are the reduction of short-term oscillations of the exchange rate, the impact at the level of foreign exchange reserves, as well as the maintaining the price and financial stability as the ultimate goal of most central banks. The paper will present intervention strategies on foreign exchange market, which involves the implementation of interventions in the market of options, forward, foreign currency repo and foreign currency swaps. Then, on the spot market, interventions using an auction, as well as the application of foreign currency indexed certificates.

scholarly journals Financial Stability, the Trilemma, and International Reserves

2010 ◽  
Vol 2 (2) ◽  
pp. 57-94 ◽  
Author(s):  
Maurice Obstfeld ◽  
Jay C Shambaugh ◽  
Alan M Taylor
Keyword(s):  
Exchange Rate ◽  
Financial Stability ◽  
Foreign Currency ◽  
Exchange Rate Policy ◽  
International Reserves ◽  
Short Term ◽  
Financial Openness ◽  
Stability Model ◽  
Rate Policy ◽  
Modern Era

The rapid growth of international reserves, a development concentrated in the emerging markets, remains a puzzle. In this paper, we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt. (JEL E23, E43, E44, F31, F32, F34)

scholarly journals Exchange Rate Fluctuations and Firm Leverage

2020 ◽  
Vol 20 (283) ◽  
Author(s):  
Ilhyock Shim ◽  
Sebnem Kalemli-Ozcan ◽  
Xiaoxi Liu
Keyword(s):  
Exchange Rate ◽  
Foreign Currency ◽  
Emerging Market ◽  
Firm Level ◽  
Balance Sheets ◽  
Net Worth ◽  
Exchange Rate Fluctuations ◽  
Level Data ◽  
Firm Leverage ◽  
Foreign Currency Debt

We quantify the effect of exchange rate fluctuations on firm leverage. When home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency debt. These firms can borrow more as a result and increase their leverage. When home currency depreciates, the reverse happens as firms have to de-lever with a negative shock to their balance sheets. Using firm-level data for leverage from 10 emerging market economies during the period from 2002 to 2015, we show that firms operating in countries whose non-financial sectors hold more of the debt in foreign currency, increase (decrease) their leverage relatively more after home currency appreciations (depreciations). Combining the leverage data with firm-level FX debt data for 4 emerging market countries, we further show that our results hold at the most granular level. Our quantitative results are asymmetric: the effects of depre-ciations, that are generally associated with sudden stops, are quantitatively larger than those of appreciations, which take place at a slower pace over time during capital inflow episodes. As our exercise compares depreciations and appreciations of similar size, these results are suggestive of financial frictions being more binding during depreciations than a possible relaxation of such frictions during appreciations.

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