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The risk‐taking channel of currency appreciation: A structural VAR investigation of Asian emerging market economies

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  • Hyeon‐seung Huh
  • David Kim

Abstract

In this study, we analyze the impact of currency appreciation on sovereign spread and economic activities in Asian emerging market economies (EMEs) using a structural vector autoregression model. The key issue under scrutiny is the presence of a risk‐taking financial channel and its strength against the conventional trade channel. The underlying structural shocks are identified by a mix of sign, size, and zero restrictions. Based on the various measures of country risk, we find empirical evidence that a currency appreciation is expansionary for Asian EMEs through the financial channel, compressing the sovereign spread and offsetting the trade channel. We provide the policy implications of these results.

Suggested Citation

  • Hyeon‐seung Huh & David Kim, 2021. "The risk‐taking channel of currency appreciation: A structural VAR investigation of Asian emerging market economies," International Finance, Wiley Blackwell, vol. 24(3), pages 313-331, December.
    • Handle: RePEc:bla:intfin:v:24:y:2021:i:3:p:313-331
    DOI: 10.1111/infi.12398
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    References listed on IDEAS

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