Research

Abstract:

Macroprudential FX regulation aims to reduce systemic risk, yet its unintended consequences remain largely unexplored. This paper provides empirical evidence that policies taxing dollar lending can widen financing disparities between small and large firms reliant on foreign currency debt. Using administrative data on the universe of formally registered firms in Peru, I examine the implementation of a FX tax by the Peruvian Central Bank. I find that a 10% increase in a bank’s exposure to the policy expands the gap in loan growth between small and large firms by 1.6 percentage points. While large firms adjust by shifting to local currency debt, credit to small firms is significantly affected. Using data on the universe of FX derivatives contracts I find that the firms most affected by the policy lack exchange rate hedging and are exposed to currency risk. Additionally, the policy’s impact is strongest in non-asset-backed loans, suggesting that borrowing constraints play a key role explaining these heterogeneous effects. These findings underscore the importance of cheap dollar credit in easing small firms' financing constraints and highlight the trade-offs involved in macroprudential FX regulation.

Abstract:

This paper investigates the granular transmission of U.S. monetary policy shocks to deviations from the uncovered interest rate parity (UIPDs) in emerging economies. Using a comprehensive dataset from Chile that accounts for firm-bank relationships and the time-variant characteristics of both firms and banks, we uncover several key findings: (1) Shocks to the federal funds rate (FFR) increase banks' costs of foreign borrowing. (2) These higher credit costs disproportionately affect small firms, raising their UIPDs more than for large firms. (3) This size-differentiated impact stems from the relatively higher interest rates on domestic currency loans faced by small firms. (4) In contrast, interest rates on dollar-denominated loans respond homogeneously across all firms. (5) We find no differential effect on loan quantities, suggesting an active role of credit supply and demand. We rationalize these findings with a small open economy model of corporate default that incorporates heterogeneous firms borrowing from domestic banks in both foreign and domestic currencies. In our model, a higher FFR reduces the marginal cost of defaulting on domestic-currency debt for small firms more than for large firms.

Abstract:

We document a novel channel through which bank regulations generate cross-border real effects via international trade linkages. We exploit a one-time, unexpected increase in loan provisions in Spain and use comprehensive administrative data from the Spanish credit register matched with the quasi-universe of firm-level trade flows spanning from 2009 to 2013. Spanish importers and exporters that relied on banks most affected by the policy experienced significant reductions in credit supply, leading to a contraction in their trade flows, with the effect being more pronounced for importers. By leveraging bilateral trade data at both the country and product level, we further show that overall Spanish imports declined following the policy, suggesting limited reallocation across Spanish importers. The decrease in Spain's import demand triggered a contraction in the total exports of Spain's trade partners, particularly among those expected to face higher trade costs when exporting to Spain--such as more distant partners, those with greater tariff and non-tariff barriers and no common language. The effect is also stronger for products that are more difficult to reallocate to other markets--those where Spain is a key global buyer or those with greater heterogeneity. Our documented trade channel is further amplified by the presence of Spanish banks abroad.