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FX resilience around the world: Fighting volatile cross-border capital flows

Author

Listed:
  • Chen, Louisa
  • Liu, Estelle Xue
  • Liu, Zijun

Abstract

The volatility of cross-border capital flow (CF) has become higher in the last two decades. We use a sample of advanced and emerging market economies in the last two decades, with a focus on portfolio fund flows (equities and bonds). We find that the impact of portfolio CF volatility on exchange rate (FX) volatility is diminished in the short-term if specific economic fundamentals of the country are stronger, especially when these fundamentals pass certain threshold levels. The finding is controlled for different exchange rate regimes and the level of capital control. We further introduce an intuitive FX resilience measure that can be used to assess the stability of exchange rates in the context of heightened CF volatility. The decomposed FX resilience measure shows that the major contributing fundamentals to FX resilience are from the finance channel, including short-term interest rate, fiscal surplus, and financial development.

Suggested Citation

  • Chen, Louisa & Liu, Estelle Xue & Liu, Zijun, 2024. "FX resilience around the world: Fighting volatile cross-border capital flows," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006859
    DOI: 10.1016/j.irfa.2024.103753
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    More about this item

    Keywords

    Capital flow volatility; Exchange rate volatility; Moderating factors; Exchange rate resilience measure;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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