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Forex interventions and exchange rate exposure: Evidence from emerging market firms

Ekta Sikarwar

Economic Modelling, 2020, vol. 93, issue C, 69-81

Abstract: Foreign exchange (forex) interventions by central banks have recently become too frequent in emerging markets. The effects of these interventions on exchange rate volatility are widely documented, but their implications for firm-level outcomes have rarely been examined. This study argues that forex interventions should influence the sensitivity of firms’ cash flows to currency movements. Accordingly, I address a novel question regarding the effect of forex interventions on emerging market firms’ exchange rate risk exposure. I find an asymmetric effect, such that the impact of forex purchase interventions differs from that of forex sale interventions. Moreover, the positive effects of forex sale interventions on the magnitude of firms’ exposure are more pronounced during depreciation periods. Study findings imply that firms remain unhedged, given that interventions are perceived as implicit government guarantees against currency fluctuations. Credible communication from policymakers regarding the motives for interventions by central banks would assist in alerting firms to potential currency risks.

Keywords: Exchange rate risk exposure; Foreign exchange intervention; Emerging markets; Asymmetric; Central banks (search for similar items in EconPapers)
JEL-codes: E50 F31 G15 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.07.010

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