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Foreign exchange intervention and the banking system balance sheet in emerging market economies

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  • Blaise Gadanecz
  • Aaron Mehrotra
  • Madhusudan S Mohanty

Abstract

Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting currency appreciation has major implications for the composition of banking system balance sheets. The domestic monetary consequences depend on the nature of central bank liabilities that are the counterpart of forex reserves. Even if the immediate change in bank reserves due to FX intervention is offset by the sale of securities, bank lending may still be stimulated, running counter to the aims of the monetary authority. In this paper, we empirically investigate the impact of banks’ holdings of liquid government securities, generated by such intervention, on bank credit in a panel of EMEs. We find that, for well capitalised banking systems, holdings of government and central bank paper over time lead to an expansion in their credit to the private sector. This result is confirmed at both country and bank level. The balance sheet effects of large-scale FX intervention therefore require close attention.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 445.

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Length: 34 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:bis:biswps:445

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Keywords: bank lending; sterilised intervention; foreign exchange reserves; central bank securities; emerging market economies;

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References

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  1. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 435-39, May.
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  3. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(2), pages 297-312, August.
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  6. William F. Bassett & Mary Beth Chosak & John C. Driscoll & Egon Zakrajsek, 2012. "Changes in bank lending standards and the macroeconomy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-24, Board of Governors of the Federal Reserve System (U.S.).
  7. M S Mohanty & Philip Turner, 2006. "Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  8. Fabrizio Zampolli, 2012. "Sovereign debt management as an instrument of monetary policy: an overview," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 97-118 Bank for International Settlements.
  9. Andrew Filardo & Madhusudan Mohanty & Ramon Moreno, 2012. "Central bank and government debt management: issues for monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal policy, public debt and monetary policy in emerging market economies, volume 67, pages 51-71 Bank for International Settlements.
  10. David Cook & James Yetman, 2012. "Expanding central bank balance sheets in emerging Asia: a compendium of risk and some evidence," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 30-75 Bank for International Settlements.
  11. Benjamin M. Friedman, 1978. "Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 593-641.
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Cited by:
  1. Koray Alper & Mahir Binici & Selva Demiralp & Hakan Kara & Pinar Ozlu, 2014. "Reserve Requirements, Liquidity Risk and Credit Growth," Working Papers 1424, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  2. Philip Turner, 2014. "The exit from non-conventional monetary policy: what challenges?," BIS Working Papers 448, Bank for International Settlements.

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