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

36 Pages Posted: 30 Oct 2020

See all articles by Minsuk Kim

Minsuk Kim

International Monetary Fund (IMF)

Rui C. Mano

International Monetary Fund

Mico Mrkaic

International Monetary Fund (IMF)

Date Written: September 2020

Abstract

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.

Keywords: Foreign exchange, Exchange rate arrangements, Exchange rates, Currencies, Exchange rate flexibility, WP, tag0, firm, mi, balance sheet data, FX intervention

JEL Classification: F31, F34, G11, O16, E42

Suggested Citation

Kim, Minsuk and Mano, Rui C. and Mrkaic, Mico, Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data (September 2020). IMF Working Paper No. 20/197, Available at SSRN: https://ssrn.com/abstract=3721220

Minsuk Kim (Contact Author)

International Monetary Fund (IMF) ( email )

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

Rui C. Mano

International Monetary Fund ( email )

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

HOME PAGE: http://sites.google.com/site/ruimano/

Mico Mrkaic

International Monetary Fund (IMF) ( email )

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

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