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Exchange rate effects of financial regulations

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  • Perez-Reyna, David
  • Villamizar-Villegas, Mauricio

Abstract

In this paper we analyze the effects of financial constraints on the exchange rate through the portfolio balance channel. We use a sharp policy discontinuity within the Colombian financial system to empirically test for the portfolio balance channel, using high frequency data during the period of 2004–2015. Our findings suggest that the effects on the exchange rate are short-lived and significant only when banking constraints are binding. To understand the mechanism behind this result we construct a tractable two-period general equilibrium model in which banking limits on foreign holdings inhibit capital flows. When these limits bind, departures from the uncovered interest rate parity enable sterilized foreign exchange interventions to influence the exchange rate.

Suggested Citation

  • Perez-Reyna, David & Villamizar-Villegas, Mauricio, 2019. "Exchange rate effects of financial regulations," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 228-245.
    • Handle: RePEc:eee:jimfin:v:96:y:2019:i:c:p:228-245
    DOI: 10.1016/j.jimonfin.2019.05.008
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    Cited by:

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    2. Wilhelmsson, Mats, 2022. "What is the impact of macroprudential regulations on the Swedish housing market?," Journal of Housing Economics, Elsevier, vol. 57(C).
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    4. Richard Clarida, 2018. "The global factor in neutral policy rates: Some implications for exchange rates, monetary policy, and policy coordination," BIS Working Papers 732, Bank for International Settlements.
    5. Itamar Caspi & Amit Friedman & Sigal Ribon, 2022. "The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-31, December.

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    More about this item

    Keywords

    Sterilized FX intervention; Portfolio channel; Financial constraints; Policy discontinuity;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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