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 rel ated real effects, and whether local unconventional policies can attenuate such spillovers. For identification, we exploit GFC shocks, differential re liance of domestic banks on foreign debt, and central bank interventions in FX derivatives using three matched administrative registers from Brazil. T he register of foreign credit flows to banks, the credit register, and a ma tched employer-employee database. Using loan-level data, we find that after the announcement of US Quantitative Easing tapering by Ben Bernanke, chair man 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 employmen t. The tapering speech is associated with massive appreciation of th e USD and increased FX volatility in EMEs. However, Central Bank of Brazil (BCB) attenuates this negative effects announcing a large intervention prog ram in the FX derivatives market, which consists in supplying insurance aga inst FX risks - hedger of last resort. In additio n to these two subsequent shocks, we analyze a panel over 2008-2015 and fin d a broader channel: banks with larger foreign debt respond to USD apprecia tion, increased FX volatility, and tighter US monetary policy decreasing cr edit supply. Moreover, FX interventions mitigate these effects of the GFC, confirming that the policy of hedger of last resort has been effective in d ecreasing local economy exposure to global conditions. Our results have imp ortant implications for international macro-finance models and policy-maker s.
DTSTAMP:20260406T093809Z DTSTART:20171206T170000Z DTEND:20171206T183000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR