Topic: Dollar Funding, Bank Currency Mismatch, and the Transmission of Exchange Rate Policy
Speaker: Mai Li, Columbia University
Time: Thursday, 26 December, 10:00-11:30
Location: Room 217, Guanghua Building 2
This paper studies a novel transmission channel for exchange rate policy in emerging markets that acts through financial institutions. According to this “credit-supply channel," banks in emerging markets fund themselves in U.S. dollars, lend in the local currency, and bear foreign exchange risk if hedging is imperfect. This currency mismatch exposes banks to exchange rate uctuations and makes economies vulnerable to adverse global financial conditions. To ascertain the significance of this transmission mechanism, I focus on the large and unanticipated currency depreciation episode following the U.S. Fed's decision to taper the size of its security purchases and exploit the heterogeneity in banks' pre-determined exposure to currency risk. Using loan level data in Taiwan during 2012-15, I provide evidence that the effect of depreciation on credit supply is contractionary. Banks with higher net USD liabilities cut lending more and were less likely to renew loans to firms with which they had pre-existing relationships. In turn, firms with greater dependence on exposed banks hardly switched to alternative funding sources and disproportionately decreased investment and employment as compared to other firms that relied less on these banks. I find that the credit-supply effects of depreciation on investment and employment are both economically and statistically significant.
Mai Li is a Ph.D. candidate in Economics Department at Columbia University. He received his bachelor degree from Guanghua School of Management in 2014. His research interest lies in macroeconomics and international finance.
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