Hedger of Last Resort: Evidence from Brazil on FX Interventions, Local Credit and Global Financial Cycles (with Rodrigo Barbone Gonzalez, Dmitry Khametshin and José-Luis Peydró)

Abstract:

We analyze whether the global financial cycle (GFC) affects credit in domestic currency in Emerging Market Economies (EMEs) and the related real effects, and whether local unconventional policies can attenuate such spillovers. For identification, we exploit GFC shocks, differential reliance of domestic banks on foreign debt, and central bank interventions in FX derivatives using three matched administrative registers from Brazil. The register of foreign credit flows to banks, the credit register, and a matched employer-employee database. Using loan-level data, we find that after the announcement of US Quantitative Easing tapering by Ben Bernanke, chairman of the FED, in May 2013, domestic banks with larger reliance on foreign debt reduce the supply of credit to firms, which in turn reduces employment. The tapering speech is associated with massive appreciation of the USD and increased FX volatility in EMEs. However, Central Bank of Brazil (BCB) attenuates this negative effects announcing a large intervention program in the FX derivatives market, which consists in supplying insurance against FX risks - hedger of last resort. In addition to these two subsequent shocks, we analyze a panel over 2008-2015 and find a broader channel: banks with larger foreign debt respond to USD appreciation, increased FX volatility, and tighter US monetary policy decreasing credit supply. Moreover, FX interventions mitigate these effects of the GFC, confirming that the policy of hedger of last resort has been effective in decreasing local economy exposure to global conditions. Our results have important implications for international macro-finance models and policy-makers.