Discussion of Sebnem Kalemli-Ozcan, Xiaoxi Liu and Ilhyock Shim’s paper
Filippo di Mauro ()
A chapter in The price, real and financial effects of exchange rates, 2018, vol. 96, pp 127-129 from Bank for International Settlements
Exchange rate appreciations can be expansionary or contractionary for an economy whose currency appreciates vis-à-vis the US dollar. The standard Mundell-Fleming model predicts a contractionary effect as a result of a decline in net exports with an appreciating currency. However, it is possible that investment responds positively to an exchange rate appreciation. This can work via two channels: the interest rate channel and the balance sheet channel. To be able to guide the policy debate, one needs to know which of these channels dominate in the aggregate. Kalemli-Ozcan et al (2018) provide evidence on this conjecture, focusing on the balance sheet channel. They ask whether firms will take on more debt if the exchange rate of their home country appreciates vis-à-vis the US dollar.
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