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Does the financial channel of exchange rates offset the trade channel?

Listed author(s):
  • Jonathan Kearns
  • Nikhil Patel

While the trade channel indicates that an exchange rate depreciation will stimulate domestic economic activity, the financial channel can have the opposite effect. When banks and non-banks have foreign currency liabilities, an exchange rate depreciation has valuation effects that can lead to a tightening in domestic financial conditions. Using trade-weighted exchange rates and new BIS-constructed debt-weighted exchange rates to separate these influences, this article finds that the financial channel partly offsets the trade channel for emerging market economies but the effect is weaker for advanced economies.

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Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2016)
Issue (Month): (December)
Pages:

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Handle: RePEc:bis:bisqtr:1612i
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  1. Bénétrix, Agustin S. & Lane, Philip R. & Shambaugh, Jay C., 2015. "International currency exposures, valuation effects and the global financial crisis," Journal of International Economics, Elsevier, vol. 96(S1), pages 98-109.
  2. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2014. "Importers, Exporters, and Exchange Rate Disconnect," American Economic Review, American Economic Association, vol. 104(7), pages 1942-1978, July.
  3. Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2016. "Sovereign yields and the risk-taking channel of currency appreciation," BIS Working Papers 538, Bank for International Settlements.
  4. Vivian Yue & Sangeeta Pratap & George Alessandria, 2010. "Export Dynamics in Large Devaluations," 2010 Meeting Papers 1067, Society for Economic Dynamics.
  5. Matthieu Bussière & Simona Delle Chiaie & Tuomas A Peltonen, 2014. "Exchange Rate Pass-Through in the Global Economy: The Role of Emerging Market Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(1), pages 146-178, April.
  6. Enisse Kharroubi, 2011. "The trade balance and the real exchange rate," BIS Quarterly Review, Bank for International Settlements, September.
  7. Robert N. McCauley & Patrick McGuire & Vladyslav Sushko, 2015. "Global dollar credit: links to US monetary policy and leverage," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 187-229.
  8. Hélène Rey, 2015. "Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence," NBER Working Papers 21162, National Bureau of Economic Research, Inc.
  9. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, vol. 100(1), pages 304-336, March.
  10. repec:hrv:faseco:30703874 is not listed on IDEAS
  11. Christian Gillitzer & Angus Moore, 2016. "Trade Invoicing Currency and First-stage Exchange Rate Pass-through," RBA Research Discussion Papers rdp2016-05, Reserve Bank of Australia.
  12. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  13. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
  14. Forbes, Kristin & Hjortsoe, Ida & Nenova, Tsvetelina, 2015. "The shocks matter: improving our estimates of exchange rate pass-through," Discussion Papers 43, Monetary Policy Committee Unit, Bank of England.
  15. Bordo, Michael D. & Meissner, Christopher M. & Stuckler, David, 2010. "Foreign currency debt, financial crises and economic growth: A long-run view," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 642-665, June.
  16. Gust, Christopher & Leduc, Sylvain & Vigfusson, Robert, 2010. "Trade integration, competition, and the decline in exchange-rate pass-through," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 309-324, April.
  17. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 437-492.
  18. Matthieu Bussière & Giovanni Callegari & Fabio Ghironi & Giulia Sestieri & Norihiko Yamano, 2013. "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-2009," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 118-151, July.
  19. Martina Jašová & Richhild Moessner & Előd Takáts, 2016. "Exchange rate pass-through: What has changed since the crisis?," BIS Working Papers 583, Bank for International Settlements.
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