Description

Countries with de jure floating exchange rate regimes are often reluctant to allow their
 currencies to float freely in practice. One reason why countries may wish to limit
 exchange rate volatility is potential negative balance sheet effects due to currency
 mismatches on the balance sheets of firms and households. In this paper, we show in a
 sample of 15 emerging market economies that countries with large foreign exchange (FX)
 debt in the non-financial private sector tend to react more strongly to exchange rate
 changes using both FX interventions and monetary policy. Thus, our results support the
 idea that an important source of “fear of floating” is balance sheet currency mismatches.
 This effect is asymmetric; that is, countries stem depreciation but not appreciation
 pressure. Moreover, FX debt financed through the domestic banking system is more
 important for fear of floating than FX debt obtained directly from external sources.

More publications in this series: Working Papers

More publications by: Tatsiana Kliatskova ; Uffe Mikkelsen