Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets
56 Pages Posted: 5 Dec 2022 Last revised: 12 Jul 2023
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Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets
Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets
Date Written: November 21, 2022
Abstract
Using matched bank-firm-level data and estimating difference-in-differences regressions around the 2014 depreciation of the euro, we show that exchange rate depreciations can lead to higher loan supply by raising banks’ net worth and interbank lending. Large banks with high net dollar exposure do not increase their lending to non-financial firms directly, but—through interbank markets—to small banks without foreign-currency asset exposure but with a high share of exporting firms in their portfolio. We also find that German regions with such small banks experience higher output growth following the depreciation. These findings show the importance of banks’ balance sheet structure and interbank markets in transmitting exchange rate shocks to the real economy.
Keywords: Exchange Rates, Bank Lending, Interbank Markets, Real Effects, Regional Busi-ness Cycles, Germany
JEL Classification: E44, E52, G21, O40
Suggested Citation: Suggested Citation