{
  "title": "Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data",
  "publication": "IMF Working Papers, September 25, 2020",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2020/09/25/do-fx-interventions-lead-to-higher-debt-evidence-from-firm-level-data-49752",
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  "summary": "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.",
  "authors": [
    "Minsuk Kim",
    "Rui Mano",
    "Mico Mrkaic"
  ],
  "publishDate": "2020-09-25",
  "series": "IMF Working Papers",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Central banks frequently conduct FX interventions (FXIs) — buying or selling reserves — to dampen sharp exchange rate movements caused by volatile capital flows.\n- This study investigates whether FXIs incentivize firms to take on more unhedged FX debt, thereby increasing medium-term corporate vulnerabilities.\n- 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."
    },
    {
      "heading": "Data and Methodology",
      "content": "- Dataset: close to 5,000 nonfinancial firms.\n- Coverage: 19 emerging markets.\n- Period: 2002--2017.\n- Outcome variable: firm-level share of FX debt.\n- Key explanatory variable: intensity of FX interventions (FXI)."
    },
    {
      "heading": "Main Findings",
      "content": "- The firm-level share of FX debt rises following intensive use of FXIs.\n- The effect is particularly pronounced for:\n  - non-exporting firms, and\n  - firms in shallow financial markets, especially those with no FX debt to begin with.\n- Magnitude:\n  - One standard deviation increase in FXI leads to an average 2 percentage points increase in the FX debt share.\n- Reference statistic:\n  - The median share of FX debt in the sample is zero."
    },
    {
      "heading": "Economic Significance",
      "content": "- 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)."
    },
    {
      "heading": "Policy Implications and Interpretation",
      "content": "- FX interventions, while aimed at stabilizing exchange rates, may have unintended side effects by encouraging firms to increase unhedged FX borrowing.\n- 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.\n- 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.\n\nIMF 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\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2020/09/25/do-fx-interventions-lead-to-higher-debt-evidence-from-firm-level-data-49752"
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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",
    "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.",
    "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).",
    "The firm-level share of FX debt rises following intensive use of FXIs.",
    "The effect is particularly pronounced for:",
    "Magnitude:",
    "Reference statistic:",
    "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).",
    "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.",
    "**Working Paper**"
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