The Role of Foreign Currency Deposits, and the Impacts of External Shocks on CDS Spreads for EMEs (in Korean)

Hosung Chung () and Joon Myung Woo ()
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Hosung Chung: Financial & Monetary Economics Team, Economic Research Institute, The Bank of Korea
Joon Myung Woo: Financial & Monetary Economics Team, Economic Research Institute, The Bank of Korea

No 2014-35, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper examines whether foreign currency deposits help mitigate the negative impacts of external shocks coming from major emerging market economies, such as the global financial crisis. Our empirical analysis focuses on 17 emerging market economies with quarterly data covering the period from September 2005 to September 2013, using dynamic panel models. The results show that the shock-absorbing effects of foreign currency deposits depend upon countries' economic fundamentals. Specifically, those with strong fundamentals can utilize foreign currency deposits to alleviate the rises in sovereign credit swap spreads caused by external shocks. For countries with weak economic fundamentals, however, the impacts of external shocks on sovereign credit swap spreads increase with the holding of foreign currency deposits. This is the first paper to analyse the effectiveness of foreign currency deposits in absorbing external shocks using country-level panel data. Its findings can provide useful implications for EME policy authorities in their utilization of various policies to address external shocks.

Keywords: external shocks; foreign currency deposits; CDS spreads (search for similar items in EconPapers)
JEL-codes: C23 E42 E44 F32 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2014-12-17
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