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

Hyeon‐seung Huh and David Kim

International Finance, 2021, vol. 24, issue 3, 313-331

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.

Date: 2021
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https://doi.org/10.1111/infi.12398

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Persistent link: https://EconPapers.repec.org/RePEc:bla:intfin:v:24:y:2021:i:3:p:313-331

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