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International transmission of the U.S. dollar liquidity shock: The channel of FX borrowing and lending

Author

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  • Kim, Youngju
  • Lim, Hyunjoon
  • Yun, Youngjin

Abstract

Access to foreign exchange (FX) liquidity is crucial to the growth and stability of emerging market economies. We examine the impact of U.S. dollar liquidity shocks on firm investments in Korea by constructing a dataset that merges four distinct micro-level data spanning ten years from 2006 to 2015. We trace the path of FX liquidity from the international financial market to Korean banks and subsequently to listed firms. During international liquidity shocks, banks borrow less FX but pay higher interest rates. Weak banks, whose FX borrowing rates are sensitive to these shocks, reduce their FX credit supply to firms. Among the FX loan-reliant firms that are highly productive, those borrowing from weak banks reduce their investments. This channel of FX borrowing and lending accounts for 19% of the decline in the investment of listed firms during the peak of the Global Financial Crisis.

Suggested Citation

  • Kim, Youngju & Lim, Hyunjoon & Yun, Youngjin, 2024. "International transmission of the U.S. dollar liquidity shock: The channel of FX borrowing and lending," Journal of International Economics, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:inecon:v:150:y:2024:i:c:s002219962400031x
    DOI: 10.1016/j.jinteco.2024.103907
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    More about this item

    Keywords

    International liquidity shock; FX loan; Credit register; Real effect;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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