Exchange Rates and Domestic Credit-Can Macroprudential Policy Reduce the Link?

53 Pages Posted: 30 Oct 2020

See all articles by Erlend Nier

Erlend Nier

International Monetary Fund (IMF)

Thorvardur Tjoervi Olafsson

affiliation not provided to SSRN

Yuan Gao Rollinson

affiliation not provided to SSRN

Date Written: September 2020

Abstract

This paper examines empirically the role of macroprudential policy in addressing the effects of external shocks on financial stability. In a sample of 62 economies over the period of 2000: Q1-2016: Q4, our dynamic panel regressions show that an appreciation of the local exchange rate is associated with a subsequent increase in the domestic credit gap, while a prior tightening of macroprudential policies dampens this effect. These results are strong for small open economies, and robust when we explicitly account for potential simultaneity and reverse causality biases. We also examine a feedback effect where strong domestic credit pulls in additional cross-border funding, potentially further increasing systemic risk, and find that targeted capital controls can play a complementary role in alleviating this effect.

Keywords: Macroprudential policy, Credit gaps, Domestic credit, Capital controls, Real exchange rates, WP, graphic tag0, exchange rate, monetary policy, currency appreciation, real GDP

JEL Classification: E58, F32, F34, G28, E44, E32, E50, F21, F31

Suggested Citation

Nier, Erlend and Olafsson, Thorvardur Tjoervi and Rollinson, Yuan Gao, Exchange Rates and Domestic Credit-Can Macroprudential Policy Reduce the Link? (September 2020). IMF Working Paper No. 20/187, Available at SSRN: https://ssrn.com/abstract=3721212

Erlend Nier (Contact Author)

International Monetary Fund (IMF)

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

Thorvardur Tjoervi Olafsson

affiliation not provided to SSRN

No Address Available

Yuan Gao Rollinson

affiliation not provided to SSRN

No Address Available

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
8
Abstract Views
57
PlumX Metrics