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FX intervention and domestic credit: evidence from high-frequency micro data

Author

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  • Boris Hofmann
  • Hyun Song Shin
  • Mauricio Villamizar-Villegas

    (Banco de la República de Colombia)

Abstract

We employ a rarely available high-frequency micro dataset to study the impact of foreign exchange intervention on domestic credit growth. We find that sterilised purchases of dollars by the central bank dampens the flow of new domestic corporate loans in Colombia. Slowing the pace of currency appreciation plays a key role in dampening credit expansion. Our analysis sheds light on the role of FX intervention as part of the financial stability-oriented policy response to credit booms associated with capital inflow surges. **** RESUMEN: En este trabajo utilizamos datos panel de frecuencia diaria, para estudiar el impacto de las intervenciones cambiarias sobre el crédito comercial. Para el caso colombiano, encontramos que las compras (esterilizadas) de divisas ayudaron a frenar el crecimiento del crédito, sobre todo en momentos donde hubo fuertes entradas de capital. Nuestros hallazgos también indican que la devaluación de la moneda jugó un papel fundamental en la disminución del crédito. Nuestro análisis resalta el papel de la intervención cambiaria como herramienta de estabilidad financiera.

Suggested Citation

  • Boris Hofmann & Hyun Song Shin & Mauricio Villamizar-Villegas, 2019. "FX intervention and domestic credit: evidence from high-frequency micro data," Borradores de Economia 1069, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1069
    DOI: 10.32468/be.1069
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    Cited by:

    1. Alain Naef, 2020. "Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention," Working Papers 0188, European Historical Economics Society (EHES).
    2. Douglas W. Diamond & Yunzhi Hu & Raghuram G. Rajan, 2020. "The Spillovers from Easy Liquidity and the Implications for Multilateralism," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 4-34, March.
    3. Polo, Andrea & Gonzalez, Rodrigo & Khametshin, Dmitry & Peydró, José-Luis, 2018. "Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles," CEPR Discussion Papers 12817, C.E.P.R. Discussion Papers.
    4. repec:zbw:bofitp:2020_006 is not listed on IDEAS
    5. Ceron, Marcos & Nivin, Rafael & Yamunaque, Diego, 2023. "FX intervention and domestic credit in a partially dollarized economy: Evidence using microdata from Peru," Working Papers 2023-009, Banco Central de Reserva del Perú.
    6. Villamizar-Villegas, Mauricio & Arango-Lozano, Lucía & Castelblanco, Geraldine & Fajardo-Baquero, Nicolás & Ruiz-Sánchez, María Alejandra, 2022. "The effects of Monetary Policy on Capital Flows A Meta-Analysis," Working papers 93, Red Investigadores de Economía.
    7. Ryan Banerjee & Boris Hofmann & Aaron Mehrotra, 2022. "Corporate investment and the exchange rate: The financial channel," International Finance, Wiley Blackwell, vol. 25(3), pages 296-312, December.
    8. Ahmed, Rashad & Aizenman, Joshua & Jinjarak, Yothin, 2021. "Inflation and Exchange Rate Targeting Challenges Under Fiscal Dominance," Journal of Macroeconomics, Elsevier, vol. 67(C).
    9. Yun, Youngjin, 2020. "Reserve accumulation and bank lending: Evidence from Korea," Journal of International Money and Finance, Elsevier, vol. 105(C).
    10. Pierre-Richard Agénor & Timothy Jackson & Luiz Awazu Pereira da Silva, 2020. "Foreign exchange intervention and financial stability," BIS Working Papers 889, Bank for International Settlements.
    11. Shalva Mkhatrishvili & Giorgi Tsutskiridze & Lasha Arevadze, 2020. "Sterilized FX interventions may not be so sterilized," NBG Working Papers 02/2020, National Bank of Georgia.
    12. Ocampo, José Antonio & Orbegozo, German D. & Villamizar-Villegas, Mauricio, 2020. "Post-graduation from the original sin problem The effects of market participation on sovereign debt markets," Working papers 39, Red Investigadores de Economía.
    13. Shesadri Banerjee & M S Mohanty, 2021. "US monetary policy and the financial channel of the exchange rate: evidence from India," BIS Working Papers 945, Bank for International Settlements.
    14. Alexander Rodnyansky & Yannick Timmer & Naoki Yago, 2023. "Intervening against the Fed," CESifo Working Paper Series 10575, CESifo.
    15. Woo Jin Choi & Ju Hyun Pyun & Youngjin Yun, 2020. "Reserve Accumulation and Firm Investment: Evidence from Matched Bank–Firm Data," GRU Working Paper Series GRU_2020_027, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    16. Boris Hofmann & Nikhil Patel & Steve Pak Yeung Wu, 2022. "Original sin redux: a model-based evaluation," BIS Working Papers 1004, Bank for International Settlements.
    17. Rodnyansky, A. & Timmer, Y. & Yago, N., 2023. "Intervening against the Fed," Cambridge Working Papers in Economics 2357, Faculty of Economics, University of Cambridge.
    18. Alex Carrasco & David Florian Hoyle & Rafael Nivin, 2019. "SFX Interventions, Financial Intermediation, and External Shocks in Emerging Economies," Working Papers 160, Peruvian Economic Association.
    19. Grahame Johnson & Sharon Kozicki & Romanos Priftis & Lena Suchanek & Jonathan Witmer & Jing Yang, 2020. "Implementation and Effectiveness of Extended Monetary Policy Tools: Lessons from the Literature," Discussion Papers 2020-16, Bank of Canada.
    20. Ryan Niladri Banerjee & Boris Hofmann & Aaron Mehrotra, 2020. "Corporate investment and the exchange rate: The financial channel," BIS Working Papers 839, Bank for International Settlements.
    21. Perez-Reyna, David & Villamizar-Villegas, Mauricio, 2019. "Exchange rate effects of financial regulations," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 228-245.
    22. Yavuz Arslan & Carlos Cantú, 2019. "The size of foreign exchange reserves," BIS Papers chapters, in: Bank for International Settlements (ed.), Reserve management and FX intervention, volume 104, pages 1-23, Bank for International Settlements.
    23. Andrew Filardo & Mr. Gaston Gelos & Thomas McGregor, 2022. "Exchange-Rate Swings and Foreign Currency Intervention," IMF Working Papers 2022/158, International Monetary Fund.
    24. Freddy A. Pinzón-Puerto & Mauricio Villamizar-Villegas, 2023. "Do Actions Speak Louder than Words? A Foreign Exchange Intervention Analysis," Borradores de Economia 1223, Banco de la Republica de Colombia.
    25. Paolo Cavallino & Boris Hofmann, 2022. "Capital flows and monetary policy trade-offs in emerging market economies," BIS Working Papers 1032, Bank for International Settlements.

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    More about this item

    Keywords

    FX intervention; credit registry; emerging markets; financial channel of exchange rates; Intervención cambiaria; créditos comerciales; países emergentes; canal financiero de tasa de cambio;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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