The Rise in Foreign Currency Bonds: The Role of US Monetary Policy and Capital Controls

Posted: 27 Jun 2020 Last revised: 2 Oct 2020

See all articles by Philippe Bacchetta

Philippe Bacchetta

University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Rachel Cordonier

Swiss National Bank

Ouarda Merrouche

University of Lausanne

Multiple version iconThere are 2 versions of this paper

Date Written: June 24, 2020

Abstract

An unintended consequence of loose US monetary policy is the increase in currency risk exposure abroad. Using firm-level data on corporate bond issuances in 17 emerging market economies (EME) between 2003 and 2015, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This increase occurs across the board, including for firms more vulnerable to foreign exchange exposure, and is particularly strong for bonds issued in local markets. Interestingly, capital controls on bond inflows significantly decrease the likelihood of issuing in foreign currency and can even eliminate the adverse impact of low US interest rates. In contrast, macroprudential foreign exchange regulations tend to increase foreign currency issuances of non-financial corporates, although this effect can be significantly reduced using capital controls.

Keywords: foreign currency, corporate bonds, emerging markets, capital controls, currency risk

JEL Classification: G21, G30, E44

Suggested Citation

Bacchetta, Philippe and Cordonier, Rachel and Merrouche, Ouarda, The Rise in Foreign Currency Bonds: The Role of US Monetary Policy and Capital Controls (June 24, 2020). Swiss Finance Institute Research Paper No. 20-51, Available at SSRN: https://ssrn.com/abstract=3635272 or http://dx.doi.org/10.2139/ssrn.3635272

Philippe Bacchetta (Contact Author)

University of Lausanne ( email )

Faculty of Business and Economics
Internef 523
1015 Lausanne
Switzerland

HOME PAGE: http://www.hec.unil.ch/pbacchetta/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Rachel Cordonier

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

Ouarda Merrouche

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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