Floating with a Load of FX Debt?

December 30, 2015

Preview Citation

Format: Chicago

Tatsiana Kliatskova, and Uffe Mikkelsen. Floating with a Load of FX Debt?, (USA: International Monetary Fund, 2015) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Countries with de jure floating exchange rate regimes are often reluctant to allow their currencies to float freely in practice. One reason why countries may wish to limit exchange rate volatility is potential negative balance sheet effects due to currency mismatches on the balance sheets of firms and households. In this paper, we show in a sample of 15 emerging market economies that countries with large foreign exchange (FX) debt in the non-financial private sector tend to react more strongly to exchange rate changes using both FX interventions and monetary policy. Thus, our results support the idea that an important source of “fear of floating” is balance sheet currency mismatches. This effect is asymmetric; that is, countries stem depreciation but not appreciation pressure. Moreover, FX debt financed through the domestic banking system is more important for fear of floating than FX debt obtained directly from external sources.

Subject: Central bank policy rate, Exchange rate adjustments, Exchange rate policy, Exchange rates, Financial services, Foreign exchange

Keywords: Balance sheet effects, Balance sheet mismatch, Banking system FX lending, Central bank policy rate, Emerging markets, Exchange rate adjustments, Exchange rate policy, Exchange rates, FX debt, FX exposure, FX intervention, FX interventions, FX reserve, Global, Monetary policy, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/284
Stock No:

WPIEA2015284
ISBN:

9781513543307
ISSN:

1018-5941

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