Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data

September 25, 2020

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Format: Chicago

Minsuk Kim, Rui Mano, and Mico Mrkaic. Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data, (USA: International Monetary Fund, 2020) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Central banks often buy or sell reserves-–-so called FX interventions (FXIs)---to dampen sharp exchange rate movements caused by volatile capital flows. At the same time, these interventions may entail unintended side effects. In this paper, we investigate whether FXIs incentivize firms to take on more unhedged FX debt, thereby increasing medium-term corporate vulnerabilities. Using a novel dataset with close to 5,000 nonfinancial firms across 19 emerging markets covering 2002--2017, we find that the firm-level share of FX debt rises following intensive use of FXIs, particularly for non-exporting firms in shallow financial markets with no FX debt to begin with. The magnitude of this effect is economically significant, with one standard deviation increase in FXI leading to an average 2 percentage points increase in the FX debt share. For reference, the median share of FX debt in the sample is zero.

Subject: Currencies, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, Money

Keywords: Balance sheet data, Corporate balance sheet vulnerabilities, Currencies, Currency decision, Exchange rate arrangements, Exchange rate depreciation, Exchange rate flexibility, Exchange rates, Financial development, Firm, FX debt, FX intervention, FXI intensity, FXI x trade, FXIS need, Global, Instrumented FXI, Issuance data, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/197
Stock No:

WPIEA2020197
ISBN:

9781513557663
ISSN:

1018-5941

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