Mariarosaria Comunale (Bank of Lithuania) - Exchange rate fluctuations and the financial channel in emerging economies

Co-author: Joscha Beckmann (Universität Greifswald, Kiel Institute for the World Economy)

This paper assesses the financial channel of exchange rate fluctuations for emerging countries. We consider the amount of credit issued in different currencies and various exchange rate measures to analyse the impact of them on stock prices, GDP growth and domestic credits. We make use of local projections in order to look at the shocks transmission covering 11 emerging market countries for the period 2000Q1-2016Q3. We find that foreign debt plays an important macroeconomic role, entertaining various transmission channels. The direction of effects depends on country characteristics and is also related to the stance of policy among countries. The domestic credit often responds negatively to exchange rate appreciations or to increases in stock prices and GDP. Dynamics of foreign denominated credit behaves differently and does not simply follow a pro- or anti-cyclical path, displaying different dynamics with regard to GDP and stock prices. We also find that domestic depreciations lower demand with regard to foreign credit, implying a potential negative effect on investment and GDP.

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