Exchange rate fluctuations and the financial channel in emerging economies

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dc.contributor Bank of Finland Beckmann, Joscha Comunale, Mariarosaria 2021-08-30T07:58:45Z 2021-08-30T07:58:45Z 2021
dc.identifier.isbn 978-952-323-383-6
dc.identifier.issn 1456-5889
dc.description.abstract This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyze whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks’ transmission covering 11 emerging market countries for the period 2000Q1–2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand regarding foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to apeiation) decreases GDP. The financial channel works mostly in the short run except for Brazil, Malaysia, and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rate.
dc.description.tableofcontents Contents Abstract ...... 4 1 Introduction ....... 5 2 Data description...... 7 2.1 Measuring foreign currency exposure..... 7 2.2 Our dataset...... 8 3 Empirical framework....... 9 4 Results ...... 11 4.1 Stylized facts and descriptive evidence....... 11 4.2 Results from local projections....... 14 4.2.1 How effective exchange rates affect GDP growth and credit ....... 14 4.2.2 How global liquidity impacts GDP growth ...... 21 4.3 Robustness checks....... 24 4.3.1 Comparison with BVAR results ...... 28 5 Conclusions....... 29 References ....... 31 Appendix – Tables and figures..... 35
dc.format.extent 45
dc.language.iso ENG
dc.subject Bofit-kokoelma
dc.subject kehittyvät markkinat
dc.subject.other emerging markets
dc.subject.other financial channel
dc.subject.other exchange rates
dc.subject.other global liquidity
dc.title Exchange rate fluctuations and the financial channel in emerging economies
dc.type Paper
dc.identifier.urn URN:NBN:fi:bof-202108301411
dc.subject.jel F31
dc.subject.jel F41
dc.subject.jel F43
dc.subject.jel G15 BOFIT Discussion Papers
dc.series.year 2021
dc.series.number 11/2021
dc.series.sortingnumber 0011 30.8.2021
dc.subject.yso valuuttakurssit
dc.subject.yso bruttokansantuote
dc.subject.yso talouskasvu
dc.subject.yso ulkomaankauppa
dc.subject.yso luotot
dc.subject.yso velat
dc.contributor.orgunit Bank of Finland Institute for Emerging Economies (BOFIT)
dc.type.okm D4

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