Unraveling exchange rate shocks: Disentangling extensive and intensive effects on the lending channel

Mohammadreza Hassanpour, Amineh Mahmoudzadeh and Seyed Ali Madanizadeh

Emerging Markets Review, 2025, vol. 68, issue C

Abstract: This study examines how exchange rate (FX) fluctuations affect bank lending, focusing on the moderating role of liquidity. Using monthly data from Iranian banks (2007–2018), we exploit a fixed official FX rate regime to isolate extensive-margin adjustments. A 10% depreciation reduces real loan growth by 0.4 percentage points—about 30% of average monthly growth. The effect is stronger for banks with low liquidity and high non-performing loans. Local-currency and private-sector loans are most affected. The findings, which are robust to IV and GMM methods, underscore the importance of liquidity buffers in mitigating lending contractions during FX shocks and can inform macroprudential policy in emerging markets.

Keywords: Exchange rate fluctuations; Lending channel; Loan supply; Banking soundness; Liquidity ratios (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:68:y:2025:i:c:s1566014125000810

DOI: 10.1016/j.ememar.2025.101332

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