IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

The role of foreign currency lending in the impact of the exchange rate on the real economy

Listed author(s):
  • Judit Krekó


    (Magyar Nemzeti Bank (central bank of Hungary))

  • Marianna Endrész


    (Magyar Nemzeti Bank (central bank of Hungary))

The purpose of our article is to define how the FX debt of the private sector changes the impact of the exchange rate on the real economy: to identify the balance sheet channels through which depreciation of the exchange rate has a negative impact on GDP and the factors which determine whether the overall impact of depreciation will be contractionary or expansionary. In our analysis, we identified three balance sheet channels. Depreciation of the nominal exchange rate increases the debt burden of companies and households which are indebted in foreign currency and have no FX income, leading in turn to lower investments and consumption. Although the direct FX exposure of the banking sector is not significant, if banks face binding capital and/or liquidity constraints, changes in the exchange rate may have an indirect impact on the credit supply of banks through a number of channels. Looking at the impact of a weaker exchange rate on growth, our calculations show that the effect of depreciation on the lending ability of the banking system is of key importance. If we only take into account the impact of the exchange rate on the balance sheets of the households and corporate sector, the impact on competitiveness is presumably stronger, but the impact of depreciation on household income and the profitability of companies with FX debts and no natural hedge will use up approximately 50% of the expansionary effect of increased competitiveness. However, if there is also a strong balance sheet adjustment in the banking sector, the overall impact of depreciation may well be contractionary. The effect of the exchange rate on the banks’ credit supply should, at least in such a strong form, be considered as a temporary phenomenon associated with the crisis. In parallel with the consolidation of the global financial environment and further improvement in the capital position and profit prospects of the banking sector, the credit supply channel is also expected to attenuate.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Article provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its journal MNB Bulletin.

Volume (Year): 5 (2010)
Issue (Month): 1 (March)
Pages: 29-38

in new window

Handle: RePEc:mnb:bullet:v:5:y:2010:i:1:p:29-38
Contact details of provider: Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mnb:bullet:v:5:y:2010:i:1:p:29-38. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maja Bajcsy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.