Working Paper: CEPR ID: DP14928
Authors: Philippe Bacchetta; Rachel Cordonier; Ouarda Merrouche
Abstract: An unintended consequence of loose US monetary policy is the increase in currency risk exposure abroad. Using firm-level data on corporate bond issuances in 17 emerging market economies (EME) between 2003 and 2015, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This increase occurs across the board, including for firms more vulnerable to foreign exchange exposure, and is particularly strong for bonds issued in local markets. Interestingly, capital controls on bond inflows significantly decrease the likelihood of issuing in foreign currency and can even eliminate the adverse impact of low US interest rates. In contrast, macroprudential foreign exchange regulations tend to increase foreign currency issuances of non-financial corporates, although this effect can be significantly reduced using capital controls.
Keywords: foreign currency; corporate bonds; emerging markets; capital controls; currency risk
JEL Codes: G21; G30; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low US interest rates (E43) | Increased likelihood of issuing bonds in foreign currency (G15) |
| Capital controls on bond inflows (F38) | Decreased likelihood of issuing in foreign currency (F31) |
| Macroprudential foreign exchange regulations (F31) | Increased issuance of foreign currency bonds (G15) |
| Capital controls (F38) | Neutralizing adverse impact of low US interest rates on issuing in foreign currency (F31) |
| Lower US interest rates (E43) | Higher share of issuances in foreign currency (G15) |