Banking Limits on Foreign Holdings: Disentangling the Portfolio Balance Channel

Pamela Cardozo (), Fredy Gamboa-Estrada, David Perez-Reyna and Mauricio Villamizar-Villegas
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Pamela Cardozo: Banco de la República de Colombia

Borradores de Economia from Banco de la Republica de Colombia

Abstract: In this paper we analyze the effects of financial constraints on the exchange rate through the portfolio balance channel. Our contribution is twofold: First, we construct a tractable two-period general equilibrium model in which financial constraints inhibit capital flows. Hence, departures from the uncovered interest rate parity condition are used to explain the effects of sterilized foreign exchange intervention. Second, using high frequency data during 2004-2015, we use a sharp policy discontinuity within Colombian regulatory banking limits to empirically test for the portfolio balance channel. Consistent with our model's postulations, our findings suggest that the effects on the exchange rate are short-lived, and significant only when banking constraints are binding.

Keywords: Sterilized foreign exchange intervention; portfolio balance channel; uncovered interest rate parity; financial constraints; regression discontinuity design (search for similar items in EconPapers)
JEL-codes: C14 C21 C31 E58 F31 (search for similar items in EconPapers)
Pages: 28
Date: 2016-03
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:934

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