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The rise in foreign currency bonds: The role of US monetary policy and capital controls

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  • Bacchetta, Philippe
  • Cordonier, Rachel
  • Merrouche, Ouarda

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 16 emerging market economies (EMEs) between 2003 and 2017, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This effect is driven by non-exporters. 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 increase foreign currency issuances among nonfinancial companies.

Suggested Citation

  • Bacchetta, Philippe & Cordonier, Rachel & Merrouche, Ouarda, 2023. "The rise in foreign currency bonds: The role of US monetary policy and capital controls," Journal of International Economics, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:inecon:v:140:y:2023:i:c:s0022199622001416
    DOI: 10.1016/j.jinteco.2022.103709
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    Cited by:

    1. Kristin J. Forbes, 2021. "The International Aspects of Macroprudential Policy," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 203-228, August.
    2. Ahnert, Toni & Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2021. "Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?," Journal of Financial Economics, Elsevier, vol. 140(1), pages 145-174.
    3. Martin Hodula & Jan Janku & Simona Malovana & Ngoc Anh Ngo, 2024. "Geopolitical Risks and Their Impact on Global Macro-Financial Stability: Literature and Measurements," Working Papers 2024/8, Czech National Bank.
    4. Avdjiev, Stefan & Burger, John D. & Hardy, Bryan, 2024. "New spare tires: local currency credit as a global shock absorber," CEPR Discussion Papers 19288, C.E.P.R. Discussion Papers.
    5. Gan-Ochir Doojav & Munkhbayar Gantumur, 2023. "An estimated model of a commodity-exporting economy for the integrated policy framework: evidence from Mongolia," International Economics and Economic Policy, Springer, vol. 20(4), pages 651-708, October.
    6. Chen, Na & Yang, Huan, 2024. "From rural to urban: Clan, urbanization and trust," China Economic Review, Elsevier, vol. 85(C).
    7. Hodula, Martin & Janků, Jan & Malovaná, Simona & Ngo, Ngoc Anh, 2024. "Geopolitical risks and their impact on global macro-financial stability: Literature and measurements," BOFIT Discussion Papers 9/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    8. Stefan Avdjiev & John Burger & Bryan Hardy, 2024. "New spare tires: local currency credit as a global shock absorber," BIS Working Papers 1199, Bank for International Settlements.

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    More about this item

    Keywords

    Foreign currency; Corporate bonds; Emerging markets; Capital controls; Currency risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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