Working Paper: CEPR ID: DP12817
Authors: Andrea Polo; Rodrigo Gonzalez; Dmitry Khametshin; Jos Luis Peydr
Abstract: We show that local policy attenuates global financial cycle (GFC)’s spillovers. We exploit GFC shocks and Brazilian central bank interventions in FX derivatives using threematched administrative registers: credit, foreign credit to banks, and employer-employee. After U.S. Taper Tantrum (followed by Emerging Markets FX turbulence), Brazilian banks with more foreign debt cut credit supply, thereby reducing firm-level employment. A subsequent large policy intervention supplying derivatives against FX risks—hedger oflast resort—halves the negative effects. A 2008-2015 panel exploiting GFC shocks and FX interventions confirms these results and the hedging channel. However, the policy entails fiscal and moral hazard costs.
Keywords: foreign exchange; monetary policy; central bank; bank credit; hedging
JEL Codes: E5; F3; G01; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US Federal Reserve's tapering speech (E52) | Brazilian banks with higher reliance on foreign debt reduce credit supply (F65) |
| Brazilian banks with higher reliance on foreign debt reduce credit supply (F65) | decrease in firm-level employment (J63) |
| Brazilian central bank's FX intervention program announcement (F31) | negative effect on credit supply halved (E51) |
| Brazilian central bank's FX intervention program announcement (F31) | sensitivity of credit growth to banks' foreign funding decreased by 50% (F65) |
| Brazilian central bank's FX intervention program announcement (F31) | employment reductions at firms exposed to banks with high foreign debt halved (F65) |