← Search

Journal of Financial Economics Vol. 140 No. 1 2021

Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?

Toni Ahnert1,2; Kristin Forbes3,4,2; Christian Friedrich1; Dennis Reinhardt5

1 Bank of Canada · 2 Centre for Economic Policy Research · 3 Massachusetts Institute of Technology · 4 National Bureau of Economic Research · 5 Bank of England

open access

Abstract

We use a new data set on macroprudential foreign exchange (FX) regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks and markets lend in different currencies, but only banks can screen firm productivity. Regulations significantly reduce bank FX borrowing, and firms respond by increasing FX debt issuance. Moreover, regulations reduce bank sensitivity to exchange rates but are less effective at reducing the sensitivity of the broader economy. Therefore, FX regulations mitigate bank vulnerability to currency fluctuations and the global financial cycle, but appear to partially shift the snowbanks of vulnerability elsewhere.

DOI
10.1016/j.jfineco.2020.10.005
Volume
140
Issue
1
Pages
145-174
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite