Mr. Ilhyock Shim, Sebnem Kalemli-Ozcan, and Xiaoxi Liu
We quantify the effect of exchange rate fluctuations on firm leverage. When home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency debt. These firms can borrow more as a result and increase their leverage. When home currency depreciates, the reverse happens as firms have to de-lever with a negative shock to their balance sheets. Using firm-level data for leverage from 10 emerging market economies during the period from 2002 to 2015, we show that firms operating in countries whose non-financial sectors hold more of the debt in foreign currency, increase (decrease) their leverage relatively more after home currency appreciations (depreciations). Combining the leverage data with firm-level FX debt data for 4 emerging market countries, we further show that our results hold at the most granular level. Our quantitative results are asymmetric: the effects of depre-ciations, that are generally associated with sudden stops, are quantitatively larger than those of appreciations, which take place at a slower pace over time during capital inflow episodes. As our exercise compares depreciations and appreciations of similar size, these results are suggestive of financial frictions being more binding during depreciations than a possible relaxation of such frictions during appreciations.
The paper identifies a number of stylized facts on the behavior of key macroeconomic variables during high inflation and stabilization in countries in transition. To examine the extent to which these stylized facts conform to the predictions of standard open economy monetary theory, the paper develops a simple monetary model of the exchange rate incorporating price stickiness and inflation inertia, and carries out an econometric analysis of the behavior of real money balances during inflation stabilization. The paper concludes by assessing the prospects for velocity developments in countries in transition, including the likely pace of remonetization.
This paper investigates the determinants of the international role of a currency. It argues that standard determinants such as monetary performance and financial openness are at best imperfect indicators of a currency’s stability prospects, because the issuer’s promise of stability is not exogenously enforceable. The paper advocates an enforcement approach to international currencies that make explicit the underlying incentive incompatibilities. Additional enforcement determinants of currency internationalization are identified. The model is estimated using time-series cross-sectional analysis for three data sets. Monetary performance-related standard determinants fail to exhibit explanatory power, whereas the enforcement determinants are strongly significant and robust.
The separate identification of current and capital transfers was introduced for the first time in the fifth edition of the Fund’s Balance of Payments Manual (Manual), thus harmonizing with the treatment of transfers in the 1993 System of National Accounts (1993 SNA). Capital transfers are now recorded in the capital account component of the balance of payments and include debt forgiveness, migrants’ transfers, and other transfers, of which investment grants is a significant category. This paper presents the criteria for defining capital transfers and provides sources and methods of compilation, and examples of treatment, as illustrated in the Fund’s Balance of Payments Compilation Guide and Balance of Payments Textbook.