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


  • 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.

Suggested Citation

  • Jonathan Kearns & Nikhil Patel, 2016. "Does the financial channel of exchange rates offset the trade channel?," BIS Quarterly Review, Bank for International Settlements, December.
  • Handle: RePEc:bis:bisqtr:1612i

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    References listed on IDEAS

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    1. repec:eee:ecmode:v:64:y:2017:i:c:p:524-538 is not listed on IDEAS
    2. Stefan Avdjiev & Valentina Bruno & Catherine Koch, 2018. "The dollar exchange rate as a global risk factor: evidence from investment," BIS Working Papers 695, Bank for International Settlements.
    3. repec:bis:bisbps:93 is not listed on IDEAS
    4. repec:ebl:ecbull:eb-17-00547 is not listed on IDEAS
    5. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    6. repec:bis:bisifc:45-18 is not listed on IDEAS
    7. repec:bis:bisifb:45 is not listed on IDEAS

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