Our website will undergo scheduled maintenance on the morning of Thursday, August 11, 2022. During this time, connection to our website and some of its features may be unavailable. Thank you for your patience and we apologize for any inconvenience.

Report

The Real Consequences of Macroprudential FX Regulations


Abstract: I exploit a natural experiment in South Korea to examine the real effects of macroprudential foreign exchange (FX) regulations designed to reduce risk-taking by financial intermediaries. By using crossbank variation in the regulation's tightness, I show that it causes a reduction in the supply of FX derivatives (FXD) and results in a substantial decline in exports for the firms that were heavily relying on FXD hedging. I offer a mechanism in which imbalances in hedging demand, banks' costly equity financing, and firms' costly switching of banking relationships play a central role in explaining the empirical findings.

Keywords: real effects; macroprudential policy; international finance; derivatives hedging; FX risk management;

JEL Classification: D14; E44; G15; G28; G32;

Access Documents

File(s): File format is application/pdf https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr989.pdf
Description: Full text

File(s): File format is text/html https://www.newyorkfed.org/research/staff_reports/sr989.html
Description: Summary

Authors

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2021-10-01

Number: 989