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International reserves and firm investment: Identification through bank credit reallocation

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  • Choi, Woo Jin
  • Pyun, Ju Hyun
  • Yun, Youngjin

Abstract

A central bank’s accumulation of foreign reserves can reallocate domestic credit and influence investments among firms. Exploiting institutional features in Korea and connecting firms with their lending banks from 2004 to 2019, we examine how reserve accumulation and sterilization affect credit allocation and firm investment. We track the issuance of sterilization bonds by the central bank to finance reserve purchases and identify heterogeneous exposure across banks. Banks more responsive to sterilization absorb larger quantities of these bonds and adjust their loans accordingly. We find that firms–particularly those with higher liabilities to such banks–reduce investment during periods of reserve accumulation. The impact of reserve-induced credit reallocation on firm investment is centered primarily on non-listed firms, non-exporters, and firms with low productivity.

Suggested Citation

  • Choi, Woo Jin & Pyun, Ju Hyun & Yun, Youngjin, 2026. "International reserves and firm investment: Identification through bank credit reallocation," Journal of Economic Dynamics and Control, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:dyncon:v:189:y:2026:i:c:s0165188926001053
    DOI: 10.1016/j.jedc.2026.105360
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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