Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data
IMF Working Papers, September 25, 2020
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- Authors: Minsuk Kim, Rui Mano, Mico Mrkaic
- Published: September 25, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513557663.001
Summary
- Central banks frequently conduct FX interventions (FXIs) — buying or selling reserves — to dampen sharp exchange rate movements caused by volatile capital flows.
- This study investigates 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, the authors examine firm-level changes in FX debt shares following intensive FXIs.
Data and Methodology
- Dataset: close to 5,000 nonfinancial firms.
- Coverage: 19 emerging markets.
- Period: 2002--2017.
- Outcome variable: firm-level share of FX debt.
- Key explanatory variable: intensity of FX interventions (FXI).
Main Findings
- The firm-level share of FX debt rises following intensive use of FXIs.
- The effect is particularly pronounced for:
- non-exporting firms, and
- firms in shallow financial markets, especially those with no FX debt to begin with.
- Magnitude:
- One standard deviation increase in FXI leads to an average 2 percentage points increase in the FX debt share.
- Reference statistic:
- The median share of FX debt in the sample is zero.
Economic Significance
- The estimated effect (2 percentage points increase in FX debt share per one standard deviation FXI change) is described as economically significant given the baseline distribution (median FX debt share = zero).
Policy Implications and Interpretation
- FX interventions, while aimed at stabilizing exchange rates, may have unintended side effects by encouraging firms to increase unhedged FX borrowing.
- These changes in corporate balance sheets can raise medium-term vulnerabilities, particularly in environments characterized by limited financial market depth and for firms lacking prior FX exposures.
- Policymakers should weigh the short-term exchange rate stabilization benefits of FXIs against potential longer-term increases in corporate FX exposure and associated financial stability risks.
IMF Working Paper: Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data (Minsuk Kim, Rui Mano, Mico Mrkaic), Working Paper No. 2020/197, 35 pages, DOI: https://doi.org/10.5089/9781513557663.001
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