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

Author: Minsuk Kim, Rui Mano, and Mr. Mico Mrkaic

Volume/Issue: Volume 2020 Issue 197

Publication date: September 2020

ISBN: 9781513557663

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Topics covered in this book

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Money and Monetary Policy , WP , firm , balance sheet data , FX intervention , corporate balance sheet vulnerabilities , financial development , FX debt , exchange rate depreciation , FXI x trade , issuance data , FXIS need , instrumented FXI , FXI intensity , Exchange rate arrangements , Exchange rates , Currencies , Exchange rate flexibility , Global , currency decision

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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.