Floating with a Load of FX Debt?

36 Pages Posted: 17 Feb 2016

See all articles by Tatsiana Kliatskova

Tatsiana Kliatskova

German Institute for Economic Research (DIW Berlin)

Uffe Mikkelsen

International Monetary Fund (IMF)

Date Written: December 2015

Abstract

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.

Keywords: FX interventions, Balance sheet effects, exchange, exchange rate, currency, debt, International Lending and Debt Problems, All Countries,

JEL Classification: F31, F34, E58

Suggested Citation

Kliatskova, Tatsiana and Mikkelsen, Uffe, Floating with a Load of FX Debt? (December 2015). IMF Working Paper No. 15/284. Available at SSRN: https://ssrn.com/abstract=2733585

Tatsiana Kliatskova (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Uffe Mikkelsen

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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