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The rise in foreign currency bonds: the role of US monetary policy and capital controls

Philippe Bacchetta (), Rachel Arulraj-Cordonier and Ouarda Merrouche

No 2021-11, Working Papers from Swiss National Bank

Abstract: An unintended consequence of loose US monetary policy is the increase in currency risk exposure abroad. Using firm-level data on corporate bond issuances in 17 emerging market economies (EME) between 2003 and 2015, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This increase occurs across the board, including for firms more vulnerable to foreign exchange exposure, and is particularly strong for bonds issued in local markets. Interestingly, capital controls on bond inflows significantly decrease the likelihood of issuing in foreign currency and can even eliminate the adverse impact of low US interest rates. In contrast, macroprudential foreign exchange regulations tend to increase foreign currency issuances of non-financial corporates, although this effect can be significantly reduced using capital controls.

Keywords: Foreign currency; corporate bonds; emerging markets; capital controls; currency risk (search for similar items in EconPapers)
JEL-codes: E44 G21 G30 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2021
New Economics Papers: this item is included in nep-ifn, nep-isf, nep-mac and nep-mon
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Related works:
Working Paper: The Rise in Foreign Currency Bonds: The Role of US Monetary Policy and Capital Controls (2020) Downloads
Working Paper: The Rise in Foreign Currency Bonds: The Role of US Monetary Policy and Capital Controls (2020) Downloads
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